Arcutis Biotherapeutics, Inc. 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2021, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such required information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based our assessment on the criteria set forth in "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2021. The effectiveness of our internal control over financial reporting as of December 31, 2021 has been audited by an independent registered public accounting firm, as stated in their report included in Part IV Item 15, “Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K. Changes in Internal Control over Financial Reporting There was no change in our internal controls over financial reporting during the year ended December 31, 2021 covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls and Procedures Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; 105 Table of Contents Index to Financial Statements (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate. 106 Table of Contents Index to Financial Statements Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Arcutis Biotherapeutics, Inc. Opinion on Internal Control Over Financial Reporting We have audited Arcutis Biotherapeutics, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Amgen Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of the Company as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 22, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Los Angeles, California February 22, 2022 107 Table of Contents Index to Financial Statements Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. Part III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. 108 Table of Contents Index to Financial Statements Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Financial Statement Schedules. The following financial statements are included herein: Page Audited Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) F-1 Balance Sheets F-2 Statements of Operations and Comprehensive Loss F-3 Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) F-4 Statements of Cash Flows F-5 Notes to Financial Statements F-6 109 Table of Contents Index to Financial Statements (b) Exhibits. Exhibit Number Description of Document Incorporated by Reference Form Date Number Filed/Furnished Herewith 3.1 Restated Certificate of Incorporation. S-1/A 1/21/20 3.2 3.2 Restated Bylaws. S-1/A 1/21/20 3.4 4.1 Form of Common Stock Certificate. S-1/A 1/21/20 4.1 4.2† Amended and Restated Investors’ Rights Agreement, dated October 8, 2019, by and among the Registrant and certain of its stockholders. S-1/A 1/21/20 4.2 4.3 Description of Arcutis Biotherapeutics’ Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 10-K 3/19/20 4.3 10.1# Form of Indemnity Agreement. S-1 1/6/20 10.1 10.2# 2017 Stock Incentive Plan and forms of award agreements. S-1 1/6/20 10.2 10.3# 2020 Stock Incentive Plan and forms of award agreements. S-1/A 1/21/20 10.3 10.4# 2020 Employee Stock Purchase Plan and forms of award agreements. S-1/A 1/21/20 10.4 10.5# 2022 Employment Inducement Incentive Plan and forms of award agreements. * 10.6# Offer Letter, dated January 9, 2020, by and between the Registrant and Todd Franklin Watanabe. S-1/A 1/21/20 10.5 10.7# Offer Letter, dated January 9, 2020, by and between the Registrant and David W. Osborne. S-1/A 1/21/20 10.6 10.8# Offer Letter, dated January 9, 2020, by and between the Registrant and Howard G. Welgus, M.D. S-1/A 1/21/20 10.7 10.9# Offer Letter, dated January 9, 2020, by and between the Registrant and John W. Smither. S-1/A 1/21/20 10.8 10.10# Offer Letter, dated January 9, 2020, by and between the Registrant and Kenneth A. Lock. S-1/A 1/21/20 10.9 10.11# Offer Letter, dated January 9, 2020, by and between the Registrant and Patricia A. Turney. S-1/A 1/21/20 10.10 10.12# Consulting Agreement, dated August 16, 2016, by and between Bhaskar Chaudhuri and the Registrant. S-1 1/6/20 10.11 10.13†^ License Agreement, dated July 23, 2018, by and between AstraZeneca AB and the Registrant. S-1 1/6/20 10.12 10.14†^ Exclusive Option and License Agreement, dated January 4, 2018, by and between Jiangsu Hengrui Medicine Co., Ltd. and the Registrant. S-1 1/6/20 10.13 10.15†^ Collaboration Agreement, dated June 28, 2019, by and between Hawkeye Therapeutics, Inc. and the Registrant. S-1 1/6/20 10.14 10.16# Transition and Amendment Agreement, dated December 13, 2019 by and between Bhaskar Chaudhuri and the Registrant. S-1 1/6/20 10.15 10.17 Option Notice and Amendment No. 2 to Exclusive Option and License Agreement, dated December 5, 2019, by and between Jiangsu Hengrui Medicine Co., Ltd. and the Registrant. S-1 1/6/20 10.16 10.18# Severance & Change in Control Agreement, by and between the Registrant and Todd Franklin Watanabe. S-1/A 1/21/20 10.17 10.19# Severance & Change in Control Agreement, by and between the Registrant and David W. Osborne. S-1/A 1/21/20 10.18 10.20# Severance & Change in Control Agreement, by and between the Registrant and Howard G. Welgus, M.D. S-1/A 1/21/20 10.19 10.21# Severance & Change in Control Agreement, by and between the Registrant and John W. Smither. S-1/A 1/21/20 10.20 110 Table of Contents Index to Financial Statements 10.22# Severance & Change in Control Agreement, by and between the Registrant and Kenneth A. Lock. S-1/A 1/21/20 10.21 10.23# Severance & Change in Control Agreement, by and between the Registrant and Patricia A. Turney. S-1/A 1/21/20 10.22 10.24# Offer Letter, dated December 18, 2020, by and between the Registrant and Matthew R. Moore. 10-K 2/16/21 10.23 10.25# Severance & Change in Control Agreement, by and between the Registrant and Matthew R. Moore. 10-K 2/16/21 10.24 10.26†^ Supply Agreement, dated November 24, 2020, by and between Registrant and Interquim, S.A. 10-K 2/16/21 10.25 10.27†^ Exclusive Distribution Agreement, dated February 8, 2021, by and between the Registrant and Cardinal Health 105, Inc. 10-Q 5/6/21 10.1 10.28# Severance & Change in Control Agreement, by and between the Registrant and Scott L. Burrows. 10-Q 5/6/21 10.2 10.29 Sales Agreement, dated May 6, 2021, by and between the Registrant and Cowen and Company, LLC. 10-Q 5/6/21 10.3 10.30† Supply and Manufacturing Agreement, dated September 15, 2021, between DPT Laboratories, Ltd. and the Registrant. 10-Q 11/4/21 10.1 10.31# Offer Letter, dated December 13, 2021, by and between the Registrant and Mas Matsuda. * 10.32# Severance & Change in Control Agreement, by and between the Registrant and Mas Matsuda. * 10.33^ Loan and Security Agreement, dated December 22, 2021, by and among the Registrant, SLR Investment Corp. and the lenders party thereto. * 23.1 Consent of Independent Registered Public Accounting Firm. * 24.1 Power of Attorney (included in the signature page to this Annual Report on Form 10-K). * 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** 101.INS Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. * 101.SCH Inline XBRL Taxonomy Extension Schema Document. * 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. * 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. * 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. * 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. * 111 Table of Contents Index to Financial Statements 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * ______________ * Filed herewith. ** Furnished herewith. † Registrant has omitted portions of the exhibit as permitted under Item 601(b)(10) of Regulation S-K. ^ Registrant has omitted schedules and exhibits pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request. # Indicates management contract or compensatory plan. 112 Table of Contents Index to Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Arcutis Biotherapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Arcutis Biotherapeutics, Inc. (the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 22, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F-1 Table of Contents Index to Financial Statements Accrued Clinical Trial Costs Description of the Matter As of December 31, 2021, the Company recorded $13.2 million for accrued clinical trial costs. As described in Note 2 to the financial statements, the Company records accrued liabilities for estimated costs of clinical trial research and development activities conducted by third-party clinical research organizations (CROs). The Company accrues for these costs based on factors such as patient enrollment, estimates of the work completed as patients progress through the trials, and the related costs for the research activities in accordance with terms established with its third-party service providers under the respective service agreements. Auditing the Company’s accounting for accrued clinical trial costs was challenging because calculating the liability for clinical trial activity includes determining the progress or stage of completion of the activities within each clinical trial based on internal and external information, and involves a high volume of data. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s process for estimating accrued clinical trial costs, including controls over management’s measurement of clinical trial progress and the related estimates of costs incurred. We also tested controls over management’s review of the completeness and accuracy of data used in determining the accruals. To test the adequacy of the Company’s accrued clinical trial costs, we performed audit procedures that included, among others, inspecting correspondence between internal clinical trial study managers and external clinical trial service providers for selected clinical trials and performing corroborative inquiries of accounting personnel and internal clinical project managers to validate the progress of clinical trial activities. To assess the appropriate measurement of accrued clinical trial costs, we reviewed significant agreements, and associated amendments and change orders, obtained external confirmation of key study dates and patient enrollment status directly with the CROs, selected a sample of transactions to inspect invoices, and vouched payments to bank statements. Additionally, we reviewed payments made subsequent to year-end to evaluate the completeness of the accrued clinical trial costs. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Los Angeles, California February 22, 2022 F-2 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Balance Sheets (In thousands, except share and par value) December 31, 2021 2020 ASSETS Current assets: Cash and cash equivalents $ 96,449 $ 65,082 Restricted cash 1,542 1,542 Marketable securities 290,610 219,359 Prepaid expenses and other current assets 14,172 6,843 Total current assets 402,773 292,826 Property and equipment, net 2,261 2,016 Operating lease right-of-use asset 3,040 3,349 Other assets 78 78 Total assets $ 408,152 $ 298,269 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,353 $ 7,140 Accrued liabilities 25,540 15,462 Operating lease liability 433 — Total current liabilities 33,326 22,602 Operating lease liability, noncurrent 4,774 4,964 Long-term debt, net 72,350 — Other long-term liabilities 25 82 Total liabilities 110,475 27,648 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized at December 31, 2021 and December 31, 2020; no shares issued and outstanding at December 31, 2021 and December 31, 2020; — — Common stock, $ 0.0001 par value; 300,000,000 and 300,000,000 shares authorized at December 31, 2021 and December 31, 2020, respectively; 50,345,754 and 43,677,817 shares issued at December 31, 2021 and December 31, 2020, respectively; 50,255,614 and 43,338,438 shares outstanding at December 31, 2021 and December 31, 2020, respectively 5 4 Additional paid-in capital 706,233 472,569 Accumulated other comprehensive loss ( 255 ) ( 2 ) Accumulated deficit ( 408,306 ) ( 201,950 ) Total stockholders’ equity 297,677 270,621 Total liabilities and stockholders’ equity $ 408,152 $ 298,269 The accompanying notes are an integral part of these financial statements. F-3 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Year Ended December 31, 2021 2020 2019 Operating expenses: Research and development $ 145,558 $ 115,308 $ 36,522 General and administrative 60,971 21,337 6,610 Total operating expenses 206,529 136,645 43,132 Loss from operations ( 206,529 ) ( 136,645 ) ( 43,132 ) Other income, net 173 967 1,136 Net loss $ ( 206,356 ) $ ( 135,678 ) $ ( 41,996 ) Other comprehensive loss: Unrealized loss on marketable securities ( 253 ) ( 1 ) ( 1 ) Comprehensive loss $ ( 206,609 ) $ ( 135,679 ) $ ( 41,997 ) Per share information: Net loss per share, basic and diluted $ ( 4.18 ) $ ( 3.80 ) $ ( 22.78 ) Weighted-average shares used in computing net loss per share, basic and diluted 49,405,575 35,668,152 1,843,213 The accompanying notes are an integral part of these financial statements. F-4 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands, except share data) Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balance—December 31, 2018 16,262,425 $ 72,252 1,557,900 $ — $ 289 $ — $ ( 24,276 ) $ ( 23,987 ) Issuance of Series C convertible preferred stock, net of issuance costs of $ 262 8,122,963 94,239 — — — — — — Issuance of common stock upon the exercise of stock options — — 15,885 — 9 — — 9 Issuance of common stock upon the vesting of restricted stock awards — — 13,245 — 8 — — 8 Vesting of founder shares subject to repurchase — — 275,726 — — — — — Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 258,097 — 114 — — 114 Stock-based compensation expense — — — — 824 — — 824 Unrealized loss on marketable securities — — — — — ( 1 ) — ( 1 ) Net loss — — — — — — ( 41,996 ) ( 41,996 ) Balance—December 31, 2019 24,385,388 $ 166,491 2,120,853 $ — $ 1,244 $ ( 1 ) $ ( 66,272 ) $ ( 65,029 ) Conversion of preferred stock into common stock upon initial public offering ( 24,385,388 ) ( 166,491 ) 24,385,388 2 166,489 — — 166,491 Issuance of shares of common stock for initial public offering, net of issuance costs of $ 16,040 — — 10,781,250 1 167,240 — — 167,241 Issuance of shares of common stock for public offering, net of issuance costs of $ 6,640 — — 4,000,000 — 93,360 — — 93,360 Issuance of shares of common stock for private placement — — 1,400,000 — 35,000 — — 35,000 Issuance of common stock upon the exercise of stock options — — 140,226 — 430 — — 430 Vesting of founder shares subject to repurchase — — 137,863 — — — — — Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 338,670 1 246 — — 247 Shares issued pursuant to the employee stock purchase plan — — 34,188 — 617 — — 617 Stock-based compensation expense — — — — 7,943 — — 7,943 Unrealized loss on marketable securities — — — — — ( 1 ) — ( 1 ) Net loss — — — — — — ( 135,678 ) ( 135,678 ) Balance—December 31, 2020 — $ — 43,338,438 $ 4 $ 472,569 $ ( 2 ) $ ( 201,950 ) $ 270,621 Issuance of shares of common stock for public offering, net of issuance costs of $ 603 — — 6,325,000 1 207,489 — — 207,490 Issuance of common stock upon the exercise of stock options — — 257,060 — 1,265 — — 1,265 Issuance of common stock upon the vesting of restricted stock units — — 37,362 — — — — — Lapse of repurchasing rights related to common stock issued pursuant to early exercises — — 249,239 — 176 — — 176 Shares issued pursuant to the employee stock purchase plan — — 48,515 — 842 — — 842 Stock-based compensation expense — — — — 23,892 — — 23,892 Unrealized loss on marketable securities — — — — — ( 253 ) — ( 253 ) Net loss — — — — — — ( 206,356 ) ( 206,356 ) Balance—December 31, 2021 — $ — 50,255,614 $ 5 $ 706,233 $ ( 255 ) $ ( 408,306 ) $ 297,677 The accompanying notes are an integral part of these financial statements. F-5 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Statements of Cash Flows (In thousands) Year Ended December 31, 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 206,356 ) $ ( 135,678 ) $ ( 41,996 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 454 122 68 Non-cash lease expense 309 333 127 Net amortization/accretion on marketable securities 3,454 72 ( 354 ) Stock-based compensation 23,892 7,943 824 Loss on disposal of property and equipment — 42 — Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 7,329 ) ( 3,412 ) ( 3,304 ) Other assets — — ( 47 ) Accounts payable 245 5,674 ( 458 ) Accrued liabilities 10,461 11,877 2,388 Operating lease liabilities 243 ( 6 ) ( 84 ) Net cash used in operating activities ( 174,627 ) ( 113,033 ) ( 42,836 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ( 292,508 ) ( 279,103 ) ( 60,830 ) Proceeds from maturities of marketable securities 217,550 97,600 34,800 Purchases of property and equipment ( 995 ) ( 321 ) ( 295 ) Net cash used in investing activities ( 75,953 ) ( 181,824 ) ( 26,325 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of stock options 1,265 526 265 Proceeds from issuance of convertible preferred stock, net of issuance costs — — 94,239 Proceeds from initial public offering, net of issuance costs — 168,642 — Proceeds from issuance of common stock, net of issuance costs 207,490 128,360 — Proceeds from issuance of common stock for ESPP purchase 842 617 — Payment of financing costs — — ( 1,401 ) Proceeds from long-term debt, net 73,987 — — Debt issuance costs ( 1,637 ) — — Net cash provided by financing activities 281,947 298,145 93,103 Net increase in cash, cash equivalents and restricted cash 31,367 3,288 23,942 Cash, cash equivalents and restricted cash at beginning of period 66,624 63,336 39,394 Cash, cash equivalents and restricted cash at end of period $ 97,991 $ 66,624 $ 63,336 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: Interest expense paid in cash $ 142 $ — $ — Conversion of preferred stock to common stock and APIC $ — $ 166,491 $ — Right-of-use asset obtained in exchange for lease liability $ — $ 3,617 $ 391 Reduction in right-of-use asset upon reassessment of lease term $ — $ 123 $ — Deferred financing costs included in accounts payable and accrued liabilities $ — $ — $ 346 The accompanying notes are an integral part of these financial statements. F-6 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements 1. Organization and Description of Business Arcutis Biotherapeutics, Inc., or the Company, is a late-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs. The Company’s current portfolio is comprised of highly differentiated topical treatments with significant potential to treat immune-mediated dermatological diseases and conditions. The Company believes it has built the industry's leading platform for dermatologic product development. The Company’s strategy is to focus on validated biological targets and to use our drug development platform and deep dermatology expertise to develop differentiated products that have the potential to address the major shortcomings of existing therapies in its targeted indications. The Company believes this strategy uniquely positions it to rapidly advance its goal of bridging the treatment innovation gap in dermatology, while maximizing its probability of technical success. On January 17, 2020, the Company's board of directors approved a 1-for-2.0007 reverse stock split of the Company’s capital stock and the Company filed a certificate of amendment to its restated certificate of incorporation to effect the split. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse split. All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse stock split. Initial Public Offering and Follow-On Financings On February 4, 2020, the Company closed an initial public offering (IPO) issuing and selling 10,781,250 shares of common stock at a public offering price of $ 17.00 per share, including 1,406,250 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company from the offering were approximately $ 167.2 million, after deducting underwriting discounts, commissions and offering related transaction costs . Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into shares of common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding. On October 6, 2020, the Company completed a public offering of 4,000,000 shares of common stock at an offering price of $ 25.00 per share, receiving aggregate net proceeds of approximately $ 93.4 million after deducting the underwriting discounts, commissions and offering related transaction costs. In addition, the Company concurrently sold 1,400,000 shares of common stock in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, at a price per share equal to the public offering price, receiving net proceeds of $ 35.0 million. On February 5, 2021, the Company completed a public offering of 6,325,000 shares of stock at an offering price of $ 35.00 per share, including 825,000 shares sold pursuant to the underwriters full exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company were approximately $ 207.5 million, after deducting underwriting discounts, commissions, and offering related transaction costs. At-the-Market (ATM) Offerings On May 6, 2021, the Company entered into a sales agreement (Sales Agreement) with Cowen and Company, LLC (Cowen), under which the Company may from time to time issue and sell shares of its common stock through ATM offerings for an aggregate offering price of up to $ 100.0 million. Cowen will act as the Company's sales agent for the ATM program and is entitled to compensation for its services equal to 3 % of the gross proceeds of any shares of common stock sold under the Sales Agreement. The Company has not yet issued or sold any shares of common stock through the ATM program. F-7 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Debt Financing On December 22, 2021, the Company entered into a loan and security agreement (Loan Agreement) with SLR Investment Corp (SLR) and the lenders party thereto. The lenders agreed to extend term loans to the Company in an aggregate principal amount of up to $ 225.0 million, of which $ 75.0 million has been funded and is outstanding, and up to $ 150.0 million in additional funding may become available subject to the satisfaction of specified conditions. See Note 8. Liquidity The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 408.3 million and $ 202.0 million as of December 31, 2021 and 2020, respectively. The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 388.6 million and $ 286.0 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had $ 75.0 million outstanding under the Loan Agreement and has an aggregate of up to $ 150.0 million in additional funding that may become available subject to the satisfaction of specified conditions. Prior to selling common stock in its IPO, the Company had historically financed its operations primarily through the sale of its convertible preferred stock. Management expects operating losses to continue for the foreseeable future. The Company believes that its existing capital resources will be sufficient to meet the projected operating requirements for at least 12 months from the date of issuance of its financial statements. The Company will be required to raise additional capital to fund future operations. However, no assurance can be given as to whether additional needed financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, the Company may be required to curtail planned activities to significantly reduce its operating expenses. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives and have an adverse effect on its results of operations and future prospects. Coronavirus Outbreak In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 (COVID-19) outbreak. The Company is monitoring the impact COVID-19 may have on the clinical development of its product candidates, including potential delays or modifications to its ongoing and planned trials, as well as its planned commercial activities. The Company believes that the rapid spread of the Omicron variant in late 2021 and early 2022 has likely had a minor impact on the enrollment of our clinical trials. Because of this likely impact, along with the inherent challenges of enrolling young children in clinical trials, we have updated our expectation for providing topline data for the INTEGUMENT-PED trial, in atopic dermatitis subjects between two and five years of age, to 2023. The Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its financial condition and operations, including ongoing and planned clinical trials. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates such estimates and assumptions for continued reasonableness. In particular, management makes estimates with respect to accruals for research and development activities, fair value of common stock and convertible preferred stock (prior to the IPO completed in January 2020), stock-based compensation expense and income taxes. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates. F-8 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements JOBS Act Accounting Election Effective December 31, 2021, the Company is no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act) because of an increase in its market capitalization. Prior to losing this status as an emerging growth company, the JOBS Act allowed the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies, and the Company had elected to use this extended transition period. The Company can no longer take advantage of this extended transition period. Segments To date, the Company has viewed its financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of money market funds, commercial paper, U.S. Treasury securities, and short-term corporate debt securities. Restricted Cash As of December 31, 2021 and 2020, the Company held $ 1.5 million of restricted cash as collateral for a letter of credit related to our amended office space lease. See Note 7. Marketable Securities Marketable securities consist of investment grade short to intermediate-term fixed income investments that have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in fixed income securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase, including those that have maturity dates beyond one year from the balance sheet date, are classified as current assets on the balance sheets due to their highly liquid nature and availability for use in current operations. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss). Realized gains and losses as well as credit losses, if any, on marketable securities are included in other income, net. The Company evaluated the underlying credit quality and credit ratings of the issuers during the period. To date, no such credit losses have occurred or have been recorded. The cost of investments sold is based on the specific-identification method. Unrealized gains and losses on marketable securities are reported as a component of accumulated other comprehensive income (loss) on the balance sheets. Interest on marketable securities is included in other income, net. Concentration of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash to the extent recorded on the balance sheets. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held. Fair Value Measurement The Company’s financial instruments, in addition to those presented in Note 3, include cash equivalents, accounts payable, accrued liabilities, and long-term debt. The carrying amount of cash equivalents, accounts payable, and accrued liabilities approximate their fair values due to their short maturities. As the long-term debt is subject to variable interest rates that are based on market rates which regularly reset, the Company believes that the carrying value of the long-term debt approximates its fair value. F-9 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Assets and liabilities recorded at fair value on a recurring basis on the balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets which range from three to five years . Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms. Maintenance and repairs are expensed as incurred. The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairments recognized during the years ended December 31, 2021 and 2020. Leases The Company determines if an arrangement is or contains a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities, is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate, based on the information available at commencement date, to determine the present value of lease payments when its leases do not provide an implicit rate. The Company uses the implicit rate when readily determinable. The ROU asset is based on the measurement of the lease liability, includes any lease payments made prior to or on lease commencement and is adjusted for lease incentives and initial direct costs incurred, as applicable. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company considers a lease term to be the non-cancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. The Company’s lease agreements includes lease and non-lease components and the Company has elected to not separate such components for all classes of assets. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to leases with terms of 12 months or less (short-term leases) for all classes of assets. F-10 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Nonclinical and Clinical Accruals and Costs The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of nonclinical studies, clinical trials, and contract manufacturing activities. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. For the years ended December 31, 2021, 2020 and 2019, the Company has not experienced any material differences between accrued costs and actual costs incurred. Convertible Preferred Stock Prior to its IPO, the Company classified its outstanding convertible preferred stock outside of stockholders’ equity (deficit) on its balance sheets as the requirements of triggering a deemed liquidation event, as defined within its amended and restated certificate of incorporation, were not entirely within the Company’s control. In the event of such a deemed liquidation event, the proceeds from the event were to be distributed in accordance with the liquidation preferences, provided that the holders of convertible preferred stock had not converted their shares into common stock. The Company recorded the issuance of convertible preferred stock at the issuance price less related issuance costs. The Company did not adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty as to whether or when a deemed liquidation event may have occurred. In connection with the IPO in February 2020, the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock. Research and Development Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, license fees, stock-based compensation expense, materials, supplies, and the cost of services provided by outside contractors. All costs associated with research and development are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods are received or services are rendered. Such payments are evaluated for current or long-term classification based on when they will be realized. The Company has entered into, and may continue to enter into, license agreements to access and utilize certain technology. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date, none of the Company’s license agreements have been considered an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval that do not meet the definition of a derivative, are immediately recognized as research and development expense when paid or become payable, provided there is no alternative future use of the rights in other research and development projects. Stock-Based Compensation The Company accounts for share-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for such awards is the date of grant and the expense is recognized on a straight-line basis, over the expected vesting period. For share-based awards that vest subject to a performance condition, the Company will recognize compensation cost for awards if and when the Company concludes that it is probable that the awards with a performance condition will be achieved on an accelerated attribution method. The Company accounts for forfeitures as they occur. F-11 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance. The Company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based on the merits of the position. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties incurred in relation to the unrecognized tax benefits. The U.S. Congress enacted the American Rescue Plan Act on March 10, 2021, Families First Coronavirus Response Act (FFCR Act) on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020. The American Rescue Plan Act is a follow-up to the CARES Act, which continue the emergency economic stimulus package and includes spending and tax breaks to strengthen the U.S. economy and fund a nationwide effort to curtail the effect of COVID-19. The American Rescue Plan Act, FFCR Act, and CARES Act include numerous tax-related provisions, including modifications to the limitations on business interest expense and net operating losses (NOLs), certain refundable employee retention credits, as well as a payment delay of employer payroll taxes in 2020 after the date of enactment. On June 29, 2020, the California State Assembly Bill 85 (Trailer Bill) was enacted which suspends the use of California NOL deductions and certain tax credits, including research and development credits, for the 2020, 2021, and 2022 tax years. The Company does not expect the American Rescue Plan Act, FFCR Act, CARES Act, or Trailer Bill to have a material impact on the Company’s financial statements. Variable Interest Entities The Company reviews agreements it enters into with third-party entities, pursuant to which the Company may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (VIE). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s financial statements. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event. The Company currently does not consolidate any VIEs. Net Loss Per Share Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive. Shares of common stock subject to repurchase are excluded from the weighted-average shares. Recently Adopted Accounting Pronouncements There have been no new accounting pronouncements issued or effective that are expected to have a material impact on the Company's financial statements. F-12 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements 3. Fair Value Measurements The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 95,145 $ — $ — $ 95,145 Commercial paper — 119,413 — 119,413 Corporate debt securities — 114,324 — 114,324 U.S. Treasury securities 58,177 — — 58,177 Total assets $ 153,322 $ 233,737 $ — $ 387,059 December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 65,082 $ — $ — $ 65,082 Commercial paper — 45,518 — 45,518 U.S. Treasury securities 173,841 — — 173,841 Total assets $ 238,923 $ 45,518 $ — $ 284,441 ______________ (1) This balance includes cash requirements settled on a nightly basis. Money market funds and U.S. Treasury securities are valued based on quoted market prices in active markets, with no valuation adjustment. Commercial paper and corporate debt securities are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. The following table summarizes the estimated value of the Company’s cash, cash equivalents and marketable securities, and the gross unrealized holding gains and losses (in thousands): December 31, 2021 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) $ 95,145 $ — $ — $ 95,145 Corporate debt securities 1,304 — — 1,304 Total cash and cash equivalents $ 96,449 $ — $ — $ 96,449 Marketable securities: Commercial paper $ 119,413 — — $ 119,413 Corporate debt securities 113,145 ( 125 ) 113,020 U.S. Treasury securities 58,307 — ( 130 ) 58,177 Total marketable securities $ 290,865 $ — $ ( 255 ) $ 290,610 ______________ (1) This balance includes cash requirements settled on a nightly basis. F-13 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements December 31, 2020 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) 65,082 — — 65,082 Total cash and cash equivalents $ 65,082 $ — $ — $ 65,082 Marketable securities: Commercial paper $ 45,518 $ — $ — $ 45,518 U.S. Treasury securities 173,843 7 ( 9 ) 173,841 Total marketable securities $ 219,361 $ 7 $ ( 9 ) $ 219,359 ______________ (1) This balance includes cash requirements settled on a nightly basis. Realized gains or losses on investments for the years ended December 31, 2021 and 2020 were no t material. As of December 31, 2021 and 2020, unrealized losses on marketable securities were no t material, and accordingly, no allowance for credit losses were recorded. As of December 31, 2021 and 2020, all securities have a maturity of 18 months or less and all securities with gross unrealized losses have been in a continuous loss position for less than one year. 4. Balance Sheet Components Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2021 2020 Prepaid clinical trial costs $ 5,629 $ 4,865 Prepaid insurance 518 249 Tax credits 362 510 Other prepaid expenses and current assets 7,663 1,219 Total prepaid expenses and other current assets $ 14,172 $ 6,843 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2021 2020 Clinical trial accruals $ 13,217 $ 9,754 Accrued compensation 9,130 4,434 Accrued expenses and other current liabilities 3,193 1,274 Total accrued liabilities $ 25,540 $ 15,462 F-14 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements 5. Property and Equipment, net Property and equipment, net consists of the following (in thousands): December 31, 2021 2020 Computer hardware $ 775 $ 286 Furniture and fixtures 346 230 Software 104 — Construction in process — 298 Leasehold improvements 1,568 1,280 Property and equipment, gross 2,793 2,094 Less accumulated depreciation ( 532 ) ( 78 ) Property and equipment, net $ 2,261 $ 2,016 Depreciation expense was $ 454,000 , $ 122,000 , and $ 68,000 for the years ended December 31, 2021, 2020, and 2019 respectively. Leasehold improvements are depreciated over the term of the lease, which is the shorter of the improvements' expected useful lives and the lease term. All other fixed asset depreciation is recorded using the straight-line method over the estimated useful lives of the assets ( two to five years ). 6. License Agreements AstraZeneca License Agreement In July 2018, the Company entered into an exclusive license agreement, or the AstraZeneca License Agreement, with AstraZeneca AB (AstraZeneca), granting the Company a worldwide exclusive license, with the right to sublicense through multiple tiers, under certain AstraZeneca-controlled patent rights, know-how and regulatory documentation, to research, develop, manufacture, commercialize and otherwise exploit products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, the AZ-Licensed Products, for all diagnostic, prophylactic and therapeutic uses for human dermatological indications, or the Dermatology Field. Under this agreement, the Company has sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at its expense, and it shall use commercially reasonable efforts to develop, obtain and maintain regulatory approvals for, and commercialize the AZ-Licensed Products in the Dermatology Field in each of the United States, Italy, Spain, Germany, the United Kingdom, France, China, and Japan. The Company paid AstraZeneca an upfront non-refundable cash payment of $ 1.0 million and issued 484,388 shares of Series B convertible preferred stock, valued at $ 3.0 million on the date of the AstraZeneca License Agreement, which were both recorded in research and development expense. The Company subsequently paid AstraZeneca the first milestone cash payment of $ 2.0 million upon the completion of a Phase 2b study of topical roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product, which was recorded in research and development expense. The Company has agreed to make additional cash payments to AstraZeneca of up to an aggregate of $ 12.5 million upon the achievement of specified regulatory approval milestones with respect to the AZ-Licensed Products, which includes $ 7.5 million upon FDA approval of the Company's first product, and payments up to an additional aggregate amount of $ 15.0 million upon the achievement of certain aggregate worldwide net sales milestones. With respect to any AZ-Licensed Products the Company commercializes under the AstraZeneca License Agreement, it will pay AstraZeneca a low to high single-digit percentage royalty rate on the Company’s, its affiliates’ and its sublicensees’ net sales of such AZ-Licensed Products, subject to specified reductions, 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. There were no payments made or due in connection with AZ-Licensed Products for the years ended December 31, 2021 and 2020. F-15 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Hengrui Exclusive Option and License Agreement In January 2018, the Company entered into an exclusive option and license agreement, or the Hengrui License Agreement, with Jiangsu Hengrui Medicine Co., Ltd. (Hengrui), whereby Hengrui granted the Company an exclusive option to obtain certain exclusive rights to research, develop and commercialize products containing the compound designated by Hengrui as SHR0302, a Janus kinase type 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Japan, Canada and the European Union (including for clarity the United Kingdom). The Company made a $ 0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement, which was recorded as research and development expense. In December 2019, the Company exercised its exclusive option under the agreement, for which it made a $ 1.5 million cash payment, which was recorded in research and development expense, and also contemporaneously amended the agreement to expand the territory to additionally include Canada. In addition, the Company has agreed to make cash payments of up to an aggregate of $ 20.5 million upon achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $ 200.0 million in sales-based milestones based on certain aggregate annual net sales volumes with respect to a licensed product. With respect to any products the Company commercializes under the Hengrui License Agreement, it will pay tiered royalties to Hengrui on net sales of each licensed product by the Company, or its affiliates, or its sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions. The Company is obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis. Additionally, the Company is obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income it receives from sublicensees of its rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance. There were no payments made or due in connection with Hengrui for the years ended December 31, 2021 and 2020. Hawkeye Collaboration Agreement In June 2019, the Company entered into a collaboration agreement, or Hawkeye Agreement, with Hawkeye Therapeutics, Inc. (Hawkeye), a related party with common ownership, for the development of one or more new applications of roflumilast. The Hawkeye Agreement grants Hawkeye an exclusive license to certain intellectual property developed under the agreement as it relates to the applications. Contemporaneously with the execution of the Hawkeye Agreement, the Company entered into a stock purchase agreement, purchasing 995,000 shares of Hawkeye’s common stock at $ 0.0001 per share, representing 19.9 % of the outstanding common stock of Hawkeye at the time of the purchase. In the event that Hawkeye issues shares of Series A convertible preferred stock with proceeds over $ 5.0 million, Hawkeye is required to issue to the Company a number of fully-paid fully-vested shares of common stock determined by dividing (i) $ 2,000,000 by (ii) an amount equal to the cash price per share for Series A convertible preferred stock. Other than the potential issuance of this common stock, there are no upfront payments, milestones or royalties pursuant to the Hawkeye Agreement. The Company determined that Hawkeye is a VIE for which consolidation is not required as it is not the primary beneficiary. 7. Commitments and Contingencies Operating Lease The Company leases 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 comprising 22,643 square feet. F-16 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements The Company recognized the ROU asset and lease liability for the new space on May 1, 2020. The lease payment term for the new space began on December 30, 2020. The lease payments terminate 91 months thereafter, with a renewal option for a term of five years . The Company will have a one-time option to cancel the lease after month 67 . The renewal and one-time cancellation options have not been considered in the determination of the ROU asset or lease liability, as the Company did not consider it reasonably certain it would exercise these options. The lease is subject to fixed rate escalation increases with an initial base rent of $ 76,000 per month, and includes rent free periods aggregating approximately one year . As a result, the Company recognizes rent expense on a straight-line basis for the full amount of the commitment including the minimum rent increases over the life of the lease and the free rent period. The amended lease agreement provided for a leasehold improvement allowance up to $ 1.25 million, which the Company fully utilized by incurring related costs. This amount, along with $ 320,000 of additional costs incurred for leasehold improvements beyond the allowance, were capitalized and included in property and equipment as of December 31, 2020. The amended lease agreement also required the Company to have an available letter of credit of $ 1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met. Accordingly, in November 2020, the Company entered into a letter of credit for $ 1.5 million, which it secured with a restricted cash account in the same amount. In association with commencement of this new lease, the Company recorded lease liabilities and ROU assets of $ 3.6 million on its balance sheet as of June 30, 2020. All leasehold improvements will be depreciated over the remaining term of the lease. The annual rental payments of the Company’s operating lease liability as of December 31, 2021 are as follows (in thousands): Amounts 2022 $ 781 2023 964 2024 994 2025 1,025 2026 1,054 Thereafter 1,740 Total minimum lease payments $ 6,558 Less: Amounts representing interest ( 1,351 ) Present value of future minimum lease payments $ 5,207 Current portion operating lease liability 433 Operating lease liability, noncurrent 4,774 Total operating lease liability $ 5,207 Straight-line rent expense recognized for operating leases was $ 686,000 , $ 602,000 , and $ 151,000 for the years ended December 31, 2021, 2020, and 2019, respectively. There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the years ended December 31, 2021, 2020, and 2019. F-17 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements The following information represents supplemental disclosure for the statement of cash flows related to the Company’s operating lease (in thousands): December 31, 2021 2020 2019 Cash flows from operating activities Cash paid for amounts included in the measurement of lease liabilities $ 114 $ 192 $ 141 The following summarizes additional information related to the operating lease: December 31, 2021 Weighted-average remaining lease term (in years) 6.6 Weighted-average discount rate 7.0 % Manufacturing Agreements The Company has entered into manufacturing supply agreements for the commercial supply of roflumilast cream which include certain minimum purchase commitments. Firm future purchase commitments under these agreements are approximately $ 8.2 million for 2022 and $ 0.6 million per year for 2023, 2024 and 2025. This amount does not represent all of the Company’s anticipated purchases, but instead represents only the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts. Indemnification In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by the provisions of the Company's Bylaws and the Delaware General Corporation Law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes any potential loss exposure under these indemnification agreements in excess of applicable insurance coverage is minimal. F-18 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements 8. Long-term debt On December 22, 2021, the Company entered into a Loan Agreement with SLR and the lenders party thereto. The lenders agreed to extend term loans to the Company in an aggregate principal amount of up to $ 225.0 million, comprised of (i) a tranche A term loan of $ 75.0 million, (ii) a tranche B-1 term loan of $ 50.0 million, (iii) a tranche B-2 term loan of up to $ 75.0 million, available in minimum increments of $ 15.0 million, and (iv) a tranche C term loan of up to $ 25.0 million (Term Loans). As security for the obligations under the Loan Agreement, the Company granted SLR, for the benefit of the lenders, a continuing security interest in substantially all of the Company's assets, including its intellectual property, subject to certain exceptions. The tranche A term loan under the Loan Agreement was funded on December 22, 2021 in the amount of $ 75.0 million. Each tranche B term loan is available following delivery to SLR of satisfactory evidence that the Company has received FDA approval of roflumilast cream for an indication relating to the treatment of patients with plaque psoriasis (FDA Approval). The tranche B-1 term loan will remain available for funding until the earlier of (i) 15 days after the Company has received FDA Approval and (ii) June 30, 2023. The tranche B-2 term loan will remain available for funding until June 30, 2023. The tranche C term loan is available following the achievement of a net product revenue milestone of $ 110.0 million, calculated on a trailing six month basis. The tranche C term loan will remain available for funding until September 30, 2024. Principal amounts outstanding under the Term Loans will accrue interest at a floating rate equal to the applicable rate in effect from time to time, as determined by SLR on the third business day prior to the funding date of the applicable Term Loan and on the first business day of the month prior to each payment date of each Term Loan. The applicable rate is a per annum interest rate equal to 7.45 % plus the greater of (a) 0.10 % and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. (or on any successor or substitute published rate) for a term of one month, subject to a replacement with an alternate benchmark rate and spread in certain circumstances. On December 31, 2021, the rate was 7.55 %. The maturity date for each term loan is January 1, 2027. Commencing on February 1, 2022, interest payments are payable monthly following the funding of any Term Loan. Any principal amounts outstanding under the Term Loans, if not repaid sooner, are due and payable on January 1, 202, or the Maturity Date. The Company may voluntarily prepay principal amounts outstanding under the Term Loans in minimum increments of $ 5.0 million, subject to a prepayment premium of (i) 3.0 % of the principal amount of such Term Loan so prepaid prior to December 22, 2022, (ii) 2.0 % of the principal amount of such Term Loan so prepaid after December 22, 2022 and prior to December 22, 2023, or (iii) 1.0 % of the principal amount of such Term Loan so prepaid after December 22, 2023 and prior to December 22, 2025. If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, the Company is required to make mandatory prepayments of (i) all principal amounts outstanding under the Term Loans, plus accrued and unpaid interest thereon through the prepayment date, (ii) any fees applicable by reason of such prepayment, (iii) the prepayment premiums set forth in the paragraph above, plus (iv) all other obligations that are due and payable, including expenses and interest at the Default Rate (as defined below) with respect to any past due amounts. The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, requirements as to financial reporting and insurance and restrictions on the Company’s ability to dispose of its business or property, to change its line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on its property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock or to redeem capital stock. The Company has also agreed to a financial covenant whereby, beginning with the month ending December 31, 2023, the Company must generate net product revenue in excess of specified amounts for applicable measuring periods; provided, however, that such financial covenant shall not apply if the Company’s average market capitalization over the trailing five day period prior to the last day of any measurement month is equal to or in excess of $ 400.0 million. The Company was in compliance with all covenants under the Loan Agreement as of December 31, 2021. F-19 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans. Under the Loan Agreement, an event of default will occur if, among other things, the Company fails to make payments under the Loan Agreement, the Company breaches any of our covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches, the lenders determine that a material adverse change has occurred, or the Company or the Company's assets become subject to certain legal proceedings, such as bankruptcy proceedings. Upon the occurrence and for the duration of an event of default, an additional default interest rate, or the Default Rate, equal to 4.0 % per annum will apply to all obligations owed under the Loan Agreement. The prepayment upon default and other potential additional interest provisions under the Loan Agreement were determined to be a compound embedded derivative instrument to be bifurcated from the loan and accounted for as a separate liability for accounting purposes under the guidance in ASC 815, Derivatives and Hedging. At the inception of the Loan Agreement and through December 31, 2021, the fair value of the embedded derivative was determined to be immaterial and will be remeasured at fair value each reporting period with any future changes in fair value reported in earnings. I n connection with the Loan Agreement, the Company paid a closing fee of $ 1.0 million on December 22, 2021, and is further obligated to pay (i) a final fee equal to 6.95 % of the aggregate original principal amount of the Term Loans funded upon the earliest to occur of the Maturity Date, the acceleration of any Term Loan and the prepayment, refinancing, substitution or replacement of any Term Loan and (ii) a certain amount of lenders’ expenses incurred in connection with the execution of the Loan Agreement. Additionally, in connection with the Loan Agreement, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount 3.0 % of each Term Loan funded upon (i) any change of control transaction or (ii) a revenue milestone, calculated on a trailing six month basis. Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement. As of December 31, 2021, the carrying value of the Term Loans consists of $ 75.0 million principal outstanding less the debt issuance costs of approximately $ 2.7 million, including the closing fee. The debt issuance costs have been recorded as a debt discount which are being accreted to interest expense through the maturity date of the term loan. Interest expense is calculated using the effective interest method, and is inclusive of non-cash amortization of debt issuance costs. The final maturity payment of $ 5.2 million is recognized over the life of the term loan through interest expense. As of December 31, 2021 the amortization of the deferred final fee and debt issuance costs was not material. At December 31, 2021, the effective interest rate was 9.64 %. Interest expense relating to the term loan for the year ended December 31, 2021 was $ 140,000 . As of December 31, 2020 the Company had no outstanding long-term debt. The following summarizes additional information related to our long-term debt (in thousands): December 31, 2021 Long-term debt, gross $ 80,213 Deferred final fee ( 5,213 ) Debt issuance costs ( 2,650 ) Long-term debt, net $ 72,350 9. Convertible Preferred Stock and Stockholders’ Equity Convertible Preferred Stock In connection with the Company's IPO in February 2020, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock. Common Stock The holders of the Company’s common stock have one vote for each share of common stock. Common stockholders are entitled to dividends when, as, and if declared by the board of directors. The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. As of December 31, 2021, no dividends had been declared by the board of directors. F-20 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements The Company reserved the following shares of common stock for issuance as follows: December 31, 2021 2020 Options issued and outstanding 5,757,957 3,655,945 Common stock awards available for grant under employee incentive plans 2,068,004 2,501,329 Restricted stock units outstanding 335,196 162,930 Total common stock reserved 8,161,157 6,320,204 Authorized Share Capital On February 4, 2020, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $ 0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $ 0.0001 per share. There were no shares of preferred stock outstanding as of December 31, 2021 and 2020. 10. Stock-Based Compensation In January 2020, the Company’s board of directors approved the 2020 Equity Incentive Plan (2020 Plan), which became effective January 30, 2020 in connection with the IPO. The 2020 Plan serves as the successor incentive award plan to the Company’s 2017 Equity Incentive Plan (2017 Plan) and has 2,134,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit (RSU) awards, and other stock-based awards, plus 1,550,150 shares of common stock that were reserved for issuance pursuant to future awards under the 2017 Plan at the time the 2020 Plan became effective, plus shares represented by awards outstanding under the 2017 Plan that are forfeited or lapsed unexercised and which following the effective date of the 2020 Plan are not issued under the 2017 Plan. In addition, the 2020 Plan reserve will increase on January 1 of each year beginning in 2021 through 2030, by an amount equal to the lesser of (a) four percent of the shares of stock outstanding (on an as converted basis) on the day immediately prior to the date of increase and (b) such smaller number of shares of stock as determined by our board of directors; provided, however, that no more than 11,000,000 shares of stock may be issued upon the exercise of incentive stock options. Accordingly, on January 1, 2022 and 2021, the plan reserve increased by 2,013,830 and 1,747,112 shares, respectively. As of December 31, 2021, the Company had 1,362,929 shares available for future grant under the 2020 Plan. The 2020 Plan provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors, and consultants of the Company under terms and provisions established by the board of directors. Under the terms of the 2020 Plan, options may be granted at an exercise price not less than fair market value. The Company generally grants stock-based awards with service conditions. Options granted typically vest over a four-year period but may be granted with different vesting terms. Following the Company’s IPO and in connection with the effectiveness of the Company’s 2020 Plan, the 2017 Plan terminated and no further awards will be granted under that plan. However, all outstanding awards under the 2017 Plan will continue to be governed by their existing terms. In December 2021, the Company’s board of directors approved the 2022 Employment Inducement Incentive Plan (2022 Plan). The 2022 Plan has 1,250,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, RSU awards, and other stock-based awards. No awards have been made out of this plan as of December 31, 2021. F-21 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Stock Option Activity The following summarizes option activity (in thousands, except share amounts): Number of Options Weighted- Average Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value Balance—December 31, 2020 3,655,945 12.09 8.78 59,274 Granted 2,706,171 27.65 Exercised ( 257,060 ) 4.88 Forfeited ( 288,858 ) 22.11 Expired ( 58,241 ) 28.19 Balance—December 31, 2021 5,757,957 19.06 8.37 34,887 Exercisable—12/31/2021 (1) 2,451,373 10.83 7.46 29,467 ______________ (1) Options exercisable includes early exercisable options. The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2021. As of December 31, 2020, prior to the Company's IPO in January 2020, the estimated fair value of the Company's common stock was determined by the board of directors. The intrinsic value of options exercised for the year ended December 31, 2021 was $ 5.8 million. The total grant-date fair value of the options vested during the year ended December 31, 2021 was $ 14.3 million. The weighted-average grant-date fair value of employee options granted during the year ended December 31, 2021 was $ 19.21 . Restricted Stock Unit Activity The following table summarizes information regarding our RSUs: Number of Units Weighted-Average Grant Date Fair Value Balance—December 31, 2020 162,930 $ 27.26 Granted 225,900 $ 30.51 Vested ( 37,362 ) $ 27.19 Forfeited ( 16,272 ) $ 31.23 Unvested Balance—December 31, 2021 335,196 $ 29.26 The grant date fair value of an RSU equals the closing price of our common stock on the grant date. RSUs generally vest equally over four years . There were no RSU grants prior to January 1, 2020. F-22 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Stock-Based Compensation Expense Stock-based compensation expense included in the statements of operations and comprehensive loss was as follows (in thousands): Year Ended December 31, 2021 2020 2019 Research and development $ 8,478 $ 3,503 $ 351 General and administrative 15,414 4,440 473 Total stock-based compensation expense $ 23,892 $ 7,943 $ 824 As of December 31, 2021, there was $ 54.0 million of total unrecognized compensation cost related to unvested options that are expected to vest, which is expected to be recognized over a weighted-average period of 3.0 years. As of December 31, 2021, there was $ 7.1 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 3.0 years. In March 2021, in connection with the retirement of the former Chief Financial Officer, the Company modified the terms of this individual’s historical stock awards. As a result of the modifications, the Company recognized approximately $ 5.3 million of incremental stock-based compensation expense during the period, which is included in general and administrative expenses. In determining the fair value of the stock options granted, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment. Fair value of common stock— For options granted prior to IPO in the year ended December 31, 2019, given the absence of a public trading market, the Company’s board of directors with input from management considered numerous objective and subjective factors to determine the fair value of common stock. The factors included, but were not limited to: (i) third-party valuations of the Company’s common stock; (ii) the Company’s stage of development; (iii) the status of research and development efforts; (iv) the rights, preferences, and privileges of the Company’s convertible preferred stock relative to those of the Company’s common stock; (v) the Company’s operating results and financial condition, including the Company’s levels of available capital resources; (vi) equity market conditions affecting comparable public companies; (vii) general U.S. market conditions; and (viii) the lack of marketability of the Company’s common stock. For options granted after IPO, the Company uses its closing stock price as reported on Nasdaq on the grant date for the fair value of its stock. Expected Term —The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company used the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term. Expected Volatility —The Company does not yet have sufficient trading history for its common stock to solely use its own historical volatility. Therefore, the expected volatility was estimated based on a combination of its own historical common stock volatility as well as the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle, and area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Risk-Free Interest Rate —The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option. Dividend Yield —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero . F-23 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements The fair value of stock option awards granted was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2021 2020 2019 Expected term (in years) 5.5 – 6.2 5.5 – 6.8 5.1 – 6.6 Expected volatility 80.6 – 85.2 % 78.4 – 80.8 % 68.6 – 72.5 % Risk-free interest rate 0.6 – 1.3 % 0.3 – 1.4 % 1.6 – 2.6 % Dividend yield — % — % — % Early Exercise of Employee Options The terms of the 2017 and 2020 Plans permit certain option holders to exercise options before their options are vested, subject to certain limitations. Upon early exercise, the awards become subject to a restricted stock agreement. The shares of restricted stock granted upon early exercise of the options are subject to the same vesting provisions in the original stock option awards. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment, at the price paid by the purchaser. While such shares have been issued, they are not considered outstanding for accounting purposes until they vest and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature. The liability is reclassified into common stock and additional paid-in capital as the shares vest and the repurchase right lapses. Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $ 82,000 and $ 258,000 as a liability from the early exercise in the accompanying balance sheets as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, there were $ 57,000 and $ 176,000 recorded in accrued liabilities, respectively, and $ 25,000 and $ 82,000 recorded in other long-term liabilities, respectively related to shares that were subject to repurchase. Founder Awards In August 2016, the Company issued 1,187,738 shares of restricted common stock to founders, of which 1,102,903 shares would vest under a service condition, and 84,835 shares would vest under a performance condition. The shares were issued under the terms of the respective restricted stock purchase agreements, or the Stock Purchase Agreement, and unvested shares were subject to repurchase by the Company at the original purchase price per share upon the holder’s termination of his relationship with the Company. The restricted shares were not considered outstanding for accounting purposes until they vested and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature. One-fourth of the 1,102,903 shares of restricted common stock were vested on the first-anniversary date and the remaining 827,177 shares vested on a monthly basis thereafter. All shares of restricted stock subject to the award were vested as of June 30, 2020. 2020 Employee Stock Purchase Plan The Company adopted the 2020 Employee Stock Purchase Plan, or the ESPP, which became effective on January 30, 2020 in connection with the IPO. The ESPP is designed to allow the Company’s eligible employees to purchase shares of the Company’s common stock, at semi-annual intervals, with their accumulated payroll deductions. Under the ESPP, participants are offered the option to purchase shares of the Company’s common stock at a discount during a series of successive offering periods. The option purchase price will be the lower of 85 % of the closing trading price per share of the Company’s common stock on the first trading date of an offering period in which a participant is enrolled or 85 % of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period. F-24 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements The ESPP is intended to qualify under Section 423 of the U.S. Internal Revenue Service Code of 1986, as amended. The maximum number of the Company’s common stock which will be authorized for sale under the ESPP is equal to the sum of (a) 351,000 shares of common stock and (b) an annual increase on the first day of each year beginning in 2021 and ending in 2030, equal to the lesser of (i) 1 % of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the Company’s board of directors; provided, however, no more than 5,265,000 shares of the Company’s common stock may be issued under the ESPP. Accordingly, on January 1, 2022 and 2021, the ESPP reserve increased by 503,457 and 436,778 shares, respectively. Stock-based compensation expense related to the ESPP was $ 442,000 and $ 346,000 for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, 82,703 shares of stock have been issued under the ESPP. 11. Income Taxes No provision for income taxes was recorded for the years ended December 31, 2021, 2020 and 2019. The Company has incurred NOLs only in the United States since its inception. The Company has not reflected any benefit of such NOL carryforwards in the financial statements. Reconciliation of income tax computed at federal statutory rates to the reported provision for income taxes is as follows (in thousands): Year Ended December 31, 2021 2020 2019 Tax provision at U.S. statutory rate $ ( 43,336 ) $ ( 28,493 ) $ ( 8,819 ) State income taxes, net of federal benefit ( 13,394 ) ( 9,213 ) ( 2,786 ) Research and development tax and other credits ( 2,497 ) ( 2,413 ) ( 655 ) Change in valuation allowance 44,675 30,708 9,598 Uncertain tax positions 12,562 8,801 2,604 Permanent differences 1,243 616 58 162(m) limitation 757 — — Other ( 10 ) ( 6 ) — Provision for income tax $ — $ — $ — F-25 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Significant components of the Company’s deferred income taxes were as follows (in thousands): December 31, 2021 2020 Deferred tax assets: Net operating loss carryforwards $ 76,202 $ 38,196 Intangibles 1,626 1,777 Research and development tax credits 5,832 3,370 Accruals and reserves 2,318 1,041 Right-of-use liability 1,336 1,274 Stock-based compensation 4,126 1,122 Gross deferred tax assets $ 91,440 $ 46,780 Deferred tax liabilities: Property and equipment $ ( 296 ) $ ( 299 ) Right-of-use asset ( 780 ) ( 859 ) Gross deferred tax liabilities $ ( 1,076 ) $ ( 1,158 ) Net deferred tax assets $ 90,364 $ 45,622 Less valuation allowance ( 90,364 ) ( 45,622 ) Total deferred tax assets $ — $ — Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Due to the lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $ 44.7 million and $ 30.7 million during the years ended December 31, 2021 and 2020, respectively. The Company has NOL carryforwards for federal, California and other state income tax purposes of approximately $ 361.3 million, $ 360.1 million and $ 5.3 million, respectively, as of December 31, 2021. Of the federal NOLs, $ 3.5 million originated before the 2018 tax year and will expire beginning in 2036. Under the Tax Cuts and Jobs Act of 2017, the remaining $ 357.8 million of NOLs generated after December 31, 2017 will be carried forward indefinitely. Of the $ 365.4 million in state net operating loss carryforwards $ 3.2 million can be carried forward indefinitely and the remaining start to expire in 2022. On March 27, 2020, the CARES Act was signed into law in response to the economic challenges facing U.S. businesses. Under the CARES Act, the Internal Revenue Code was amended to allow for federal NOL carrybacks for five years to offset previous years income, or can be carryforward indefinitely to offset 100% of taxable income for the tax year 2020 and 80% of taxable income for tax years 2021 and thereafter. As of the date the financial statements were available to be issued, the state NOL carryforwards, if not utilized, will expire beginning in 2030. As of December 31, 2021, the Company also had federal and California research and development tax credit carryforwards of $ 10.8 million and $ 2.4 million, respectively. The federal research and development tax credit carryforwards will begin to expire in 2037. The California research and development tax credit carryforwards are available indefinitely. Federal and California tax laws impose significant restrictions on the utilization of NOL carryforwards in the event of a change in ownership of the Company, as defined by Internal Revenue Code Section 382 and 383. The Company has not completed a formal study to determine the limitations on their tax attributes due to change in ownership and may have limitations on the utilization of NOL carryforwards, credit carryforwards, or other tax attributes due to ownership changes. F-26 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Financial Statements Uncertain Tax Benefits No liability related to uncertain tax positions is recorded on the financial statements. The following table summarizes the activity related to the unrecognized benefits (in thousands): Year Ended December 31, 2021 2020 2019 Beginning balance $ 20,274 $ 6,448 $ 2,241 Increases (decreases) related to tax positions taken during a prior year ( 6 ) 5 4 Increases related to tax positions taken during the current year 18,674 13,821 4,203 Ending balance $ 38,942 $ 20,274 $ 6,448 The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. The Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. Income tax returns are filed in the United States and California. The Company is not currently under audit by the Internal Revenue Service or similar state or local authorities. The years 2016 and forward remain open to examination by the domestic taxing jurisdictions to which the Company is subject. Due to NOL carryforwards, all years effectively remain open to income tax examination by the domestic taxing jurisdictions in which the Company files tax returns. Included in unrecognized tax benefits of $ 38.9 million at December 31, 2021 was $ 31.9 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to valuation allowance. The Company does not expect that there will be a significant change in the unrecognized tax benefits over the next 12 months. The Company is subject to taxation in the United States and state jurisdictions where applicable. Our tax years for 2016 and forward are subject to examination by the U.S. tax authorities and our tax years for 2016 and forward are subject to examination by the California tax authorities due to carryforward of unutilized NOLs and research and development credits. It is our practice to recognize interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2021, 2020 and 2019, the Company has no t recognized any interest or penalties related to income taxes. 12. Net Loss Per Share The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect: As of December 31, 2021 2020 2019 Convertible preferred stock on an as-converted basis — — 24,385,388 Stock options to purchase common stock 5,757,957 3,655,945 2,516,470 Early exercised options subject to future vesting 90,146 339,385 621,053 RSU's subject to future vesting 335,196 162,930 — ESPP shares subject to future issuance 12,219 3,733 — Restricted stock subject to future vesting — — 137,863 Total 6,195,518 4,161,993 27,660,774 F-27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ARCUTIS BIOTHERAPEUTICS, INC. Date: February 22, 2022 By: /s/ Todd Franklin Watanabe Todd Franklin Watanabe President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 22, 2022 By: /s/ Scott L. Burrows Scott L. Burrows Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Todd Franklin Watanabe, Scott L. Burrows and Mas Matsuda, his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or their, his or her substitutes or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Todd Franklin Watanabe President, Chief Executive Officer and Director (Principal Executive Officer) February 22, 2022 Todd Franklin Watanabe /s/ Scott L. Burrows Chief Financial Officer (Principal Accounting and Financial Officer) February 22, 2022 Scott L. Burrows /s/ Patrick J. Heron Director, Chairman February 22, 2022 Patrick J. Heron /s/ Bhaskar Chaudhuri Director February 22, 2022 Bhaskar Chaudhuri, Ph.D. /s/ Terrie Curran Director February 22, 2022 Terrie Curran /s/ Halley E. Gilbert Director February 22, 2022 Halley E. Gilbert /s/ Keith R. Leonard Director February 22, 2022 Keith R. Leonard /s/ Sue-Jean Lin Director February 22, 2022 Sue-Jean Lin /s/ Joseph Turner Director February 22, 2022 Joseph Turner /s/ Howard G. Welgus Director February 22, 2022 Howard G. Welgus, M.D.