What changed in this filing

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Item 1. Financial Statements

2022-05-05 compared with 2021-11-04 · 181 added, 197 removed, 492 unchanged (43% of the section changed)

3 unchanged sentences

(In thousands, except share and par value)

September 30, December 31,

March 31, December 31,

Current assets:

15 unchanged sentences

Operating lease liability, noncurrent 4,613 4,774

Long-term debt, net 72,742 72,350

Other long-term liabilities 19 25

3 unchanged sentences

Preferred stock, $ 0.0001 par value;

10,000,000 shares authorized at September 30, 2021 and December 31, 2020;

no shares issued and outstanding at September 30, 2021 and December 31, 2020;

10,000,000 shares authorized at March 31, 2022 and December 31, 2021;

no shares issued and outstanding at March 31, 2022 and December 31, 2021;

Common stock, $ 0.0001 par value;

300,000,000 shares authorized at September 30, 2021 and December 31, 2020;

50,266,730 and 43,677,817 shares issued at September 30, 2021 and December 31, 2020, respectively;

50,134,813 and 43,338,438 shares outstanding at September 30, 2021 and December 31, 2020, respectively

300,000,000 shares authorized at March 31, 2022 and December 31, 2021;

51,410,463 and 50,345,755 shares issued at March 31, 2022 and December 31, 2021, respectively;

51,360,348 and 50,255,614 shares outstanding at March 31, 2022 and December 31, 2021, respectively

Additional paid-in capital 727,417 706,233

7 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Operating expenses:

Research and development $ 40,622 $ 21,631

$ 40,604 $ 32,743 $ 93,000 $ 87,934

General and administrative 22,006 14,454

16,474 5,560 42,243 14,647

Total operating expenses 62,628 36,085

57,078 38,303 135,243 102,581

Loss from operations ( 62,628 ) ( 36,085 )

( 57,078 ) ( 38,303 ) ( 135,243 ) ( 102,581 )

Other income (expense):

Other income, net 142 43

$ ( 56,980 ) $ ( 38,204 ) $ ( 135,030 ) $ ( 101,629 )

Interest expense ( 1,838 ) —

Total other income (expense) ( 1,696 ) 43

Net loss $ ( 64,324 ) $ ( 36,042 )

Other comprehensive income (loss):

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Balance—December 31, 2020 — $ — 43,338,438 $ 4 $ 472,569 $ ( 2 ) $ ( 201,950 ) $ 270,621

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 $ 603

— — 6,325,000 1 207,489 — — 207,490

Issuance of shares of common stock upon the exercise of stock options — — 51,147 — 152 — — 152

Vesting of founder shares subject to repurchase — — 68,931 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 64,428 — 30 — — 30

Stock-based compensation expense — — — — 990 — — 990

Unrealized gain on marketable securities — — — — — 20 — 20

Net loss — — — — — — ( 28,013 ) ( 28,013 )

Balance—March 31, 2020 — $ — 37,471,997 $ 3 $ 336,145 $ 19 $ ( 94,285 ) $ 241,882

Issuance of common stock upon the exercise of stock options — — 111,282 — 325 — — 325

Vesting of founder shares subject to repurchase — — 68,932 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 114,392 — 111 — — 111

Shares issued pursuant to the employee stock purchase plan 19,862 — 287 — — 287

Stock-based compensation expense — — — — 2,049 — — 2,049

Unrealized loss on marketable securities — — — — — ( 19 ) — ( 19 )

Net loss — — — — — — ( 35,412 ) ( 35,412 )

Balance—June 30, 2020 — $ — 37,690,058 $ 3 $ 338,617 $ — $ ( 129,697 ) $ 208,923

Issuance of common stock upon the exercise of stock options — — 28,908 — 34 — — 34

Issuance of common stock upon the vesting of restricted stock units — — 32,362 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 79,925 — 53 — — 53

2 unchanged sentences

Net loss — — — — — — ( 36,042 ) ( 36,042 )

Balance—September 30, 2020 — $ — 37,798,889 $ 4 $ 340,964 $ 4 $ ( 167,901 ) $ 173,071

The accompanying notes are an integral part of these unaudited condensed financial statements.

ARCUTIS BIOTHERAPEUTICS, INC.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(In thousands, except share data)

Balance—March 31, 2021 — $ — 49,887,007 $ 5 $ 688,939 $ 42 $ ( 237,992 ) $ 450,994

Preferred Stock Common Stock Additional

3 unchanged sentences

Balance—December 31, 2021 — $ — 50,255,614 $ 5 $ 706,233 $ ( 255 ) $ ( 408,306 ) $ 297,677

Issuance of shares of common stock for public offering, net of issuance costs of $ 603

Issuance of shares of common stock under ATM, net of issuance costs of $ 634

— — 882,353 — 14,366 — — 14,366

3 unchanged sentences

Stock-based compensation expense — — — — 6,533 — — 6,533

Unrealized gain on marketable securities — — — — — 44 — 44

Net loss — — — — — — ( 36,042 ) ( 36,042 )

Balance—March 31, 2021 — $ — 49,887,007 $ 5 $ 688,939 $ 42 $ ( 237,992 ) $ 450,994

Issuance of common stock upon the exercise of stock options — — 62,314 — 710 — — 710

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 73,623 — 52 — — 52

Shares issued pursuant to the employee stock purchase plan — — 22,658 — 478 — — 478

Stock-based compensation expense — — — — 4,340 — — 4,340

Unrealized loss on marketable securities — — — — — ( 765 ) — ( 765 )

Net loss — — — — — — ( 64,324 ) ( 64,324 )

Balance—June 30, 2021 — $ — 50,045,602 $ 5 $ 694,519 $ ( 36 ) $ ( 280,000 ) $ 414,488

Issuance of common stock upon the exercise of stock options — — 30,297 — 63 — — 63

Issuance of common stock upon the vesting of restricted stock units — — 5,000 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 53,914 — 43 — — 43

Stock-based compensation expense — — — — 5,363 — — 5,363

Unrealized gain on marketable securities — — — — — 18 — 18

Net Loss — — — — — — ( 56,980 ) ( 56,980 )

Balance—September 30, 2021 — $ — 50,134,813 $ 5 $ 699,988 $ ( 18 ) $ ( 336,980 ) $ 362,995

Balance—March 31, 2022 — $ — 51,360,348 $ 5 $ 727,417 $ ( 1,020 ) $ ( 472,630 ) $ 253,772

The accompanying notes are an integral part of these unaudited condensed financial statements.

2 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

4 unchanged sentences

Net amortization/accretion on marketable securities 618 616

Non-cash interest expense 392 —

Stock-based compensation expense 6,533 8,503

9 unchanged sentences

Purchases of property and equipment ( 124 ) ( 554 )

Net cash used in investing activities ( 99,452 ) ( 105,932 )

Net cash provided by investing activities 15,297 61,996

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock upon exercise of stock options 260 325

Proceeds from initial public offering, net of issuance costs — 168,642

Proceeds from issuance of shares under ATM, net of issuance costs 14,456 —

Proceeds from issuance of common stock, net of issuance costs — 207,490

Proceeds from issuance of common stock pursuant to employee stock purchase plan 478 287

Payment of financing costs — ( 471 )

Net cash provided by financing activities 14,716 207,815

Net decrease in cash, cash equivalents, and restricted cash ( 13,304 ) ( 17,629 )

Net increase (decrease) in cash, cash equivalents, and restricted cash ( 26,962 ) 223,608

Cash, cash equivalents, and restricted cash at beginning of period 97,991 66,624

1 unchanged sentence

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:

Right-of-use asset obtained in exchange for lease liability $ — $ 3,645

Reduction in right-of-use asset upon reassessment of lease term $ — $ 139

Interest expense paid in cash $ 1,425 $ —

The accompanying notes are an integral part of these unaudited condensed financial statements.

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Organization and Description of Business

Arcutis Biotherapeutics, Inc., or the Company, is a late-stage biopharmaceutical company focused on developing meaningful innovations in immuno-dermatology to address the urgent needs of patients living with immune-mediated dermatological diseases and conditions.

The Company’s current portfolio is comprised of highly differentiated topical treatments with significant promise to treat immune-mediated dermatological diseases and conditions.

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 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’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

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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.

In March 2022, the Company sold 882,353 shares under the ATM for $ 17.00 per share and received $ 14.5 million in net proceeds.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 337.0 million and $ 202.0 million as of September 30, 2021 and December 31, 2020, respectively.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 368.8 million and $ 286.0 million as of September 30, 2021 and December 31, 2020, respectively.

Prior to selling common stock in its IPO and follow-on financings, the Company had historically financed its operations primarily through the sale of its convertible preferred stock.

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 472.6 million and $ 408.3 million as of March 31, 2022 and December 31, 2021, respectively.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 344.8 million and $ 388.6 million as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022, 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.

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In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 (COVID-19) outbreak.

As of November 4, 2021, the Company’s operations have not been significantly impacted by the COVID-19 pandemic.

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.

However, 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.

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 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, the Company has updated its expected timeline 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.

Summary of Significant Accounting Policies

10 unchanged sentences

Accordingly, the Company has determined that it operates in one segment.

Unaudited Interim Condensed Financial Statements

The interim condensed balance sheet as of September 30, 2021, the interim condensed statements of operations and comprehensive loss, and the condensed changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three and nine months ended September 30, 2021 and 2020 are unaudited.

These unaudited interim condensed financial statements have been prepared on the same basis as the Company’s audited annual financial statements and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial information.

The financial data and the other financial information disclosed in these notes to the condensed financial statements related to the three- and nine-month periods are also unaudited.

The condensed results of operations for the three

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any other future annual or interim period.

Unaudited Interim Condensed Financial Statements

The interim condensed balance sheet as of March 31, 2022, the interim condensed statements of operations and comprehensive loss, and the condensed changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2022 and 2021 are unaudited.

The financial data and the other financial information disclosed in these notes to the condensed financial statements related to the three month periods are also unaudited.

The condensed results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future annual or interim period.

The condensed balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date.

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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, and U.S.

Treasury securities.

Cash equivalents consist primarily of money market funds, commercial paper, U.S.

Treasury securities, and short-term corporate debt securities.

Restricted Cash

As of September 30, 2021 and December 31, 2020, the Company held $ 1.5 million of restricted cash as collateral for a letter of credit related to our amended office space lease.

As of March 31, 2022 and December 31, 2021, the Company held $ 1.2 million and $ 1.5 million, respectively, of restricted cash as collateral for a letter of credit related to our amended office space lease.

Marketable Securities

17 unchanged sentences

Fair Value Measurement

The Company’s financial instruments, in addition to those presented in Note 3, include cash equivalents, accounts payable, and accrued liabilities.

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.

Assets and liabilities recorded at fair value on a recurring basis on the condensed balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair values.

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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 .

Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets which range from two to five years .

Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms.

1 unchanged sentence

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 three and nine months ended September 30, 2021 and 2020.

There were no impairments recognized during the three months ended March 31, 2022 and 2021.

The Company determines if an arrangement is or contains a lease at inception.

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Notes to Condensed Financial Statements

Preclinical 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 preclinical studies, clinical trials, and contract manufacturing activities.

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.

2 unchanged sentences

As actual costs become known, the Company adjusts its accrued liabilities.

For the three and nine months ended September 30, 2021 and 2020, the Company has not experienced any material differences between accrued costs and actual costs incurred.

For the three months ended March 31, 2022 and 2021, the Company has not experienced any material differences between accrued costs and actual costs incurred.

Convertible Preferred Stock

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To date, there have been no interest or penalties incurred in relation to the unrecognized tax benefits.

The United States 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.

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.

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Shares of common stock subject to repurchase are excluded from the weighted-average shares.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

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 condensed financial statements.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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):

September 30, 2021

March 31, 2022

Level 1 Level 2 Level 3 Total

11 unchanged sentences

Commercial paper — 119,413 — 119,413

Corporate debt securities — 114,324 — 114,324

Treasury securities 58,177 — — 58,177

2 unchanged sentences

(1) This balance includes cash requirements settled on a nightly basis.

Commercial paper, corporate debt securities, money market funds, and U.S.

Treasury securities are valued taking into consideration valuations obtained from third-party pricing services.

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.

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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):

September 30, 2021

March 31, 2022

cost Unrealized

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$ 95,145 $ — $ — $ 95,145

Corporate debt securities 1,304 — — 1,304

Total cash and cash equivalents $ 96,449 $ — $ — $ 96,449

1 unchanged sentence

Commercial paper $ 119,413 $ — $ — $ 119,413

Corporate debt securities 113,145 — ( 125 ) 113,020

Treasury securities 58,307 — ( 130 ) 58,177

2 unchanged sentences

(1) This balance includes cash requirements settled on a nightly basis.

Realized gains or losses on investments for the three and nine months ended September 30, 2021 were no t material.

There were no realized gains or losses on investments for the three and nine months ended September 30, 2020.

As of September 30, 2021 and December 31, 2020, unrealized losses on marketable securities were no t material, and accordingly, no allowance for credit losses were recorded.

As of September 30, 2021 and December 31, 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.

Realized gains or losses on investments for the three months ended March 31, 2022 and 2021 were no t material.

As of March 31, 2022 and December 31, 2021, unrealized credit losses on marketable securities were no t material, and accordingly, no allowance for credit losses were recorded.

As of March 31, 2022 and December 31, 2021, 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.

ARCUTIS BIOTHERAPEUTICS, INC.

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Prepaid expenses and other current assets consist of the following (in thousands):

September 30, 2021 December 31, 2020

Prepaid clinical trial costs $ 4,356 $ 4,865

March 31, 2022 December 31, 2021

Prepaid insurance $ 2,721 $ 518

Prepaid clinical trial costs 2,362 5,629

Tax credits 362 362

3 unchanged sentences

Accrued liabilities consist of the following (in thousands):

September 30, 2021 December 31, 2020

Accrued compensation $ 6,771 $ 4,434

March 31, 2022 December 31, 2021

Clinical trial accruals $ 11,308 $ 13,217

Early exercise liability, current

Accrued compensation 3,469 9,130

Accrued expenses and other current liabilities 5,213 3,193

Total accrued liabilities $ 19,990 $ 25,540

$ 13,881 $ 15,462

Property and Equipment, net

Property and equipment, net consists of the following (in thousands):

Useful life (in years) September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Computer hardware $ 775 $ 775

6 unchanged sentences

Property and equipment, net $ 2,152 $ 2,261

Leasehold improvements are depreciated over the term of the lease.

Depreciation expense was $ 116,000 and $ 318,000 for the three and nine months ended September 30, 2021, respectively, and $ 30,000 and $ 87,000 for the three and nine months ended September 30, 2020, respectively.

Depreciation expense was $ 150,000 and $ 98,000 for the three months ended March 31, 2022 and 2021, 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 ).

ARCUTIS BIOTHERAPEUTICS, INC.

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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.

The Company subsequently paid AstraZeneca the first milestone cash payment of $ 2.0 million upon the completion of a Phase 2b study of roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product, which was recorded in research and development expense.

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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 three and nine months ended September 30, 2021 and 2020.

There were no payments made or due in connection with AZ-Licensed Products for the three months ended March 31, 2022 and 2021.

Hengrui Exclusive Option and License Agreement

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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 three and nine months ended September 30, 2021 and 2020.

There were no payments made or due in connection with Hengrui for the three months ended March 31, 2022 and 2021.

Hawkeye Collaboration Agreement

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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.

In the event that Hawkeye issues shares of Series A 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 preferred stock.

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.

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Operating Lease

The Company leases a facility in Westlake Village, California under an operating lease that commenced in February 2019.

This lease was amended in April 2020 in order to relocate to a new expanded space comprising 22,643 square feet.

At the time of the amendment, the Company reassessed the lease term of the original space in accordance with the option to terminate if leasing additional space in the same property.

In connection with the reduction of the lease term for the original space, the Company reduced the ROU asset and lease liability balance by $ 123,000 .

The Company recognized the ROU asset and lease liability for the new space on May 1, 2020, which was determined to be the lease commencement date, or the date on which the new space was made available to the Company for purposes of planning and constructing the leasehold improvements.

The lease payment term for the new space began on December 30, 2020, which was 15 days after the leasehold improvements were substantially complete.

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.

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 .

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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.

It 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.

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.

The letter of credit and corresponding restricted cash will be reduced by $ 308,000 on the first, second, third, and fourth anniversary, and by $ 45,000 on the fifth anniversary from when the lease payment term began on December 30, 2020, with no further reductions thereafter.

In association with commencement of this new lease, the Company recorded lease liabilities and ROU assets of $ 3.6 million on its condensed balance sheet as of June 30, 2020.

Since the Company was reasonably certain to incur costs equal to or exceeding the leasehold improvement allowance of $ 1.25 million, the allowance was treated as a lease incentive that was payable to the Company at the lease commencement date.

Accordingly, the leasehold improvement allowance was included in the measurement of the consideration in the contract at commencement, and was recognized as a reduction in the ROU asset and lease liability.

Upon completion of the leasehold improvements in December 2020, the $ 1.25 million allowance was reclassified from the lease liability to property and equipment on the condensed balance sheet as of December 31, 2020.

The Company capitalized $ 320,000 of additional leasehold improvements, in excess of the $ 1.25 million allowance, which were also reflected in property and equipment as of December 31, 2020.

In March 2022, the Company reduced the line of credit and related restricted cash account to $ 1.2 million.

All leasehold improvements will be depreciated over the remaining term of the lease.

The minimum annual rental payments of the Company’s operating lease liability as of September 30, 2021 are as follows (in thousands):

2021 (October through December) $ 114

The minimum annual rental payments of the Company’s operating lease liability as of March 31, 2022 are as follows (in thousands):

2022 (April through December) $ 605

Thereafter 1,740

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Total operating lease liability $ 5,120

Straight-line rent expense recognized for operating leases was $ 171,000 and $ 516,000 for the three and nine months ended September 30, 2021, respectively, and $ 202,000 and $ 395,000 for the three and nine months ended September 30, 2020, 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 three and nine months ended September 30, 2021 and 2020.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Straight-line rent expense recognized for operating leases was $ 171,000 and $ 175,000 for the three months ended March 31, 2022 and 2021, respectively.

The following information represents supplemental disclosure for the condensed statements of cash flows related to the Company’s operating lease (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

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The following summarizes additional information related to the operating lease:

September 30, 2021

March 31, 2022

Weighted-average remaining lease term (in years) 6.3

Weighted-average discount rate 7.0 %

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Manufacturing Agreements

The Company has entered into manufacturing supply agreements for the commercial supply of topical roflumilast cream which include certain minimum purchase commitments.

Firm future purchase commitments under these agreements are approximately $ 5.4 million within the next 3 months and then approximately $ 0.6 million per year for the following 4 years.

Firm future purchase commitments under these agreements are approximately $ 9.3 million within the next 9 months and then approximately $ 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.

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The Company believes any potential loss exposure under these indemnification agreements in excess of applicable insurance coverage is minimal.

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

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

Long-term debt

On December 22, 2021, the Company entered into a 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, 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 March 31, 2022, the rate was 7.68 %.

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, 2027, 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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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 March 31, 2022.

In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans.

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 March 31, 2022, 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.

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.

At March 31, 2022, the effective interest rate was 9.97 %.

Interest expense relating to the term loan for the three months ended March 31, 2022 was $ 1.8 million.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

The carrying value of the Term Loans consists of the following (in thousands):

March 31, 2022 December 31, 2021

Principal loan balance $ 75,000 $ 75,000

Accrued final fee 261 —

Unamortized debt issuance costs ( 2,519 ) ( 2,650 )

Long-term debt, net $ 72,742 $ 72,350

Convertible Preferred Stock and Stockholders’ Equity

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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 September 30, 2021, no dividends had been declared by the board of directors.

As of March 31, 2022, no dividends had been declared by the board of directors.

The Company reserved the following shares of common stock for issuance as follows:

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Options issued and outstanding 6,911,228 5,757,957

Common stock awards available for grant under employee benefit plans 2,187,166 2,501,329

Common stock awards available for grant under employee incentive plans 3,575,485 2,068,004

Restricted stock units outstanding 1,259,375 335,196

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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 September 30, 2021 and December 31, 2020.

There were no shares of preferred stock outstanding as of March 31, 2022 and December 31, 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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 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 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;

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, 2021, the plan reserve increased by 1,747,112 shares.

As of September 30, 2021, the Company had 1,456,234 shares available for future grant under the 2020 Plan.

Accordingly, on January 1, 2022 and 2021, the plan reserve increased by 2,013,830 and 1,747,112 shares, respectively.

As of March 31, 2022, the Company had 1,184,753 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.

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However, all outstanding awards under the 2017 Plan will continue to be governed by their existing terms.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

The Company began granting out of the 2022 Plan in the first quarter of 2022 and has 1,182,200 shares available for future grant under the plan as of March 31, 2022.

Stock Option Activity

5 unchanged sentences

Expired ( 4,194 ) $ 27.42

Balance—September 30, 2021 5,715,147 $ 18.84 8.57 $ 44,093

Exercisable—September 30, 2021 (1)

Balance—March 31, 2022 6,911,228 $ 19.16 8.48 $ 31,704

Exercisable—March 31, 2022 (1)

2,615,847 $ 12.50 7.36 $ 26,106

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(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 September 30, 2021.

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 nine months ended September 30, 2021 was $ 4.8 million.

The total grant-date fair value of the options vested during the nine months ended September 30, 2021 was $ 11.7 million.

The weighted-average grant-date fair value of employee options granted during the nine months ended September 30, 2021 was $ 19.48 .

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 March 31, 2022.

The intrinsic value of options exercised for the three months ended March 31, 2022 was $ 1.4 million.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

The total grant-date fair value of the options vested during the three months ended March 31, 2022 was $ 5.0 million.

The weighted-average grant-date fair value of employee options granted during the three months ended March 31, 2022 was $ 12.94 .

Restricted Stock Unit Activity

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Forfeited ( 8,900 ) $ 17.67

Unvested Balance—September 30, 2021 337,868 $ 29.27

Unvested Balance—March 31, 2022 1,259,375 $ 20.30

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 .

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

There were no RSU grants prior to January 1, 2020.

Stock-Based Compensation Expense

Stock-based compensation expense included in the condensed statements of operations and comprehensive loss was as follows (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Research and development

1 unchanged sentence

General and administrative

3,097 1,194 12,308 3,091

Total stock-based compensation expense

$ 6,533 $ 8,503

As of September 30, 2021, there was $ 56.7 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 3.2 years.

As of September 30, 2021, there was $ 7.9 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 3.2 years.

As of March 31, 2022, there was $ 64.9 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 3.1 years.

As of March 31, 2022, there was $ 24.1 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 3.6 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 compensation expense during the period, which is included in general and administrative expenses.

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.

Fair value of common stock — 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.

The Company uses the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Expected Volatility — Prior to 2022, the Company did not 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.

The Company applied that process until a sufficient amount of historical information regarding the volatility of its own stock price became available.

Beginning in 2022, having over two years of trading history, the Company began using solely its own historical stock price for expected volatility.

Risk-Free Interest Rate —The risk-free interest rate is based on the U.S.

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Therefore, the Company used an expected dividend yield of zero .

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed 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:

Nine Months Ended September 30, 2021 Year Ended

Three Months Ended March 31, 2022 Year Ended

December 31, 2021

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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 $ 110,000 and $ 258,000 as a liability from the early exercise in the accompanying condensed balance sheets as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, there were $ 79,000 and $ 176,000 recorded in accrued liabilities, respectively, and $ 31,000 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.

Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $ 58,000 and $ 82,000 as a liability from the early exercise in the accompanying condensed balance sheets as of March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and December 31, 2021, there were $ 39,000 and $ 57,000 recorded in accrued liabilities, respectively, and $ 19,000 and $ 25,000 recorded in other long-term liabilities, respectively related to shares that were subject to repurchase.

2020 Employee Stock Purchase Plan

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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, 2021, the ESPP reserve increased by 436,778 shares.

The Company commenced an offering period on January 31, 2020, which ended on May 31, 2020, and resulted in 19,862 shares of stock being issued under the ESPP.

The Company also commenced an offering period on June 1, 2020, which ended on November 30, 2020, and resulted in 14,326 shares of stock being issued under the ESPP.

In addition, the Company commenced an offering period on December 1, 2020, which ended on May 31, 2021, and resulted in 22,658 shares of stock being issued under the ESPP.

Stock-based compensation expense related to the ESPP was $ 88,000 and $ 304,000 for the three and nine months ended September 30, 2021, respectively, and $ 88,000 and $ 249,000 for the three and nine months ended September 30, 2020, respectively.

Accordingly, on January 1, 2022 and 2021, the ESPP reserve increased by 503,457 and 436,778 shares, respectively.

As of March 31, 2022, the Company had 1,208,532 shares available for future grant under the ESPP.

Stock-based compensation expense related to the ESPP was $ 209,000 and $ 117,000 for the three months ended March 31, 2022 and 2021, respectively .

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 September 30,

As of March 31,

Stock options to purchase common stock 6,911,228 4,540,255

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

What changed 10-Q

Item 1. Financial Statements