What changed in this filing

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Item 1. Financial Statements

2022-08-04 compared with 2022-05-05 · 133 added, 95 removed, 578 unchanged (28% of the section changed)

3 unchanged sentences

(In thousands, except share and par value)

March 31, December 31,

June 30, December 31,

Current assets:

21 unchanged sentences

Preferred stock, $ 0.0001 par value;

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;

10,000,000 shares authorized at June 30, 2022 and December 31, 2021;

no shares issued and outstanding at June 30, 2022 and December 31, 2021;

Common stock, $ 0.0001 par value;

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

300,000,000 shares authorized at June 30, 2022 and December 31, 2021;

51,548,438 and 50,345,755 shares issued at June 30, 2022 and December 31, 2021, respectively;

51,526,153 and 50,255,614 shares outstanding at June 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 736,665 706,233

7 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Operating expenses:

8 unchanged sentences

Net loss $ ( 67,406 ) $ ( 42,008 ) $ ( 131,730 ) $ ( 78,050 )

Other comprehensive income (loss):

Unrealized gain (loss) on marketable securities ( 765 ) 44

Other comprehensive loss:

Unrealized loss on marketable securities ( 232 ) ( 78 ) ( 997 ) ( 34 )

Comprehensive loss $ ( 67,638 ) $ ( 42,086 ) $ ( 132,727 ) $ ( 78,084 )

20 unchanged sentences

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 — — — — — ( 78 ) — ( 78 )

Net loss — — — — — — ( 42,008 ) ( 42,008 )

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

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)

Preferred Stock Common Stock Additional

12 unchanged sentences

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

Issuance of common stock upon the exercise of stock options — — 57,113 — 156 — — 156

Issuance of common stock upon the vesting of restricted stock units — — 6,625 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 27,830 — 20 — — 20

Shares issued pursuant to the employee stock purchase plan — — 74,237 — 976 — — 976

Stock-based compensation expense — — — — 8,096 — — 8,096

Unrealized loss on marketable securities — — — — — ( 232 ) — ( 232 )

Net loss — — — — — — ( 67,406 ) ( 67,406 )

Balance—June 30, 2022 — $ — 51,526,153 $ 5 $ 736,665 $ ( 1,252 ) $ ( 540,036 ) $ 195,382

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

2 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

16 unchanged sentences

Purchases of property and equipment ( 204 ) ( 597 )

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

Net cash provided by (used in) investing activities 67,862 ( 102,923 )

CASH FLOWS FROM FINANCING ACTIVITIES:

2 unchanged sentences

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

Proceeds from issuance of common stock pursuant to employee stock purchase plan 976 478

Net cash provided by financing activities 15,847 209,003

8 unchanged sentences

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.

Arcutis Biotherapeutics, Inc., or the Company, is an early commercial-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs.

The Company received U.S.

Food and Drug Administration (FDA) approval of its first product, ZORYVE TM (roflumilast) cream 0.3%, on July 29, 2022, for the treatment of individuals with plaque psoriasis, including intertriginous psoriasis, in individuals 12 years of age and older.

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

3 unchanged sentences

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.

On February 4, 2020, the Company closed an 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 .

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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.

On February 5, 2021, the Company completed a public offering of 6,325,000 shares of common 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.

On August 2, 2022, the Company priced a public offering of 8,625,000 shares of common stock at an offering price of $ 20.00 per share, including the underwriters full exercise of their option to purchase an additional 1,125,000 shares.

The aggregate net proceeds to the Company from the offering, including the exercise of the underwriters’ option to purchase additional shares, are expected to be $ 161.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

The offering is expected to close on August 5, 2022.

At-the-Market 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 at-the-market (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.

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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 $ 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.

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 540.0 million and $ 408.3 million as of June 30, 2022 and December 31, 2021, respectively.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 283.4 million and $ 388.6 million as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022, the Company had $ 75.0 million outstanding under the Loan Agreement.

Upon FDA approval of ZORYVE in July 2022, $ 125.0 million of additional funding became available under the Loan Agreement which the Company drew down and received on August 2, 2022.

After this draw down, the Company will have $ 200.0 million outstanding under the Loan Agreement, with an additional $ 25.0 million in funding that may become available subject to the satisfaction of specified conditions.

On August 2, 2022, the Company priced a public offering of its common stock, from which it expects to receive net proceeds of approximately $ 161.7 million.

The offering is expected to close on August 5, 2022.

See Notes 8 and 12.

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

1 unchanged sentence

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.

If the Company's available cash balances, amounts available under the Loan Agreement and anticipated future cash flows from operations are insufficient to satisfy its liquidity requirements, the Company may need to raise additional capital to fund its operations.

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 certain planned activities.

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.

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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

8 unchanged sentences

Actual results could differ from those estimates.

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

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 interim condensed balance sheet as of June 30, 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 and six months ended June 30, 2022 and 2021 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 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 results of operations for the three and six months ended June 30, 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.

7 unchanged sentences

Restricted Cash

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.

As of June 30, 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

13 unchanged sentences

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 condensed 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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

16 unchanged sentences

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 months ended March 31, 2022 and 2021.

There were no impairments recognized during the three and six months ended June 30, 2022 and 2021.

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

8 unchanged sentences

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

Nonclinical and Clinical Accruals and Costs

4 unchanged sentences

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

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.

For the three and six months ended June 30, 2022 and 2021, the Company has not experienced any material differences between accrued costs and actual costs incurred.

Convertible Preferred Stock

34 unchanged sentences

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.

The Company does not expect the American Rescue Plan Act, FFCR Act, or CARES Act to have a material impact on the Company’s financial statements.

Variable Interest Entities

16 unchanged sentences

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):

March 31, 2022

June 30, 2022

Level 1 Level 2 Level 3 Total

28 unchanged sentences

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):

March 31, 2022

June 30, 2022

cost Unrealized

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

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.

Realized gains or losses on investments for the three and six months ended June 30, 2022 and 2021 were no t material.

As of June 30, 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 June 30, 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.

3 unchanged sentences

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

March 31, 2022 December 31, 2021

Prepaid insurance $ 2,721 $ 518

June 30, 2022 December 31, 2021

Prepaid clinical trial costs $ 2,416 $ 5,629

Tax credits 362 362

Prepaid insurance 1,986 518

Other prepaid expenses and current assets 7,622 8,025

2 unchanged sentences

Accrued liabilities consist of the following (in thousands):

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Clinical trial accruals $ 8,782 $ 13,217

4 unchanged sentences

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Computer hardware $ 841 $ 775

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Property and equipment, net $ 2,078 $ 2,261

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

Depreciation expense was $ 155,000 and $ 305,000 for the three and six months ended June 30, 2022, respectively, and $ 104,000 and $ 202,000 for the three and six months ended June 30, 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.

8 unchanged sentences

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.

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 U.S.

Food and Drug Administration (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.

Upon the approval of ZORYVE in July 2022, $ 7.5 million became payable to AstraZeneca.

The Company has agreed to make additional cash payments to AstraZeneca of up to an aggregate of $ 5.0 million upon the achievement of specified regulatory approval milestones with respect to the AZ-Licensed Products, and payments up to an additional aggregate amount of $ 15.0 million upon the achievement of certain aggregate worldwide net sales milestones, of which $ 5.0 million will become payable when the Company achieves $ 100.0 million in worldwide sales.

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 months ended March 31, 2022 and 2021.

Royalties paid to AstraZeneca by the Company will be recorded in cost of goods sold.

There were no payments made or payable in connection with AZ-Licensed Products for the three and six months ended June 30, 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 months ended March 31, 2022 and 2021.

Hawkeye Collaboration Agreement

In June 2022, the Company entered into a side letter agreement with Hengrui and one of its subsidiaries to extend certain rights and obligations under the Hengrui License Agreement to the subsidiary under specified circumstances, including a change of control of such subsidiary.

There were no payments made or due in connection with Hengrui for the three and six months ended June 30, 2022 and 2021.

Hawkeye (Iolyx Therapeutics) Collaboration Agreement

In June 2019, the Company entered into a collaboration agreement, or Hawkeye Agreement, with Hawkeye Therapeutics, Inc.

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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 March 31, 2022 are as follows (in thousands):

2022 (April through December) $ 605

The minimum annual rental payments of the Company’s operating lease liability as of June 30, 2022 are as follows (in thousands):

2022 (July through December) $ 430

Thereafter 1,740

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Total operating lease liability $ 5,032

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.

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 months ended March 31, 2022 and 2021.

Straight-line rent expense recognized for operating leases was $ 173,000 and $ 344,000 for the three and six months ended June 30, 2022, respectively, and $ 170,000 and $ 345,000 for the three and six months ended June 30, 2021, respectively.

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

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities

1 unchanged sentence

The following summarizes additional information related to the operating lease:

March 31, 2022

June 30, 2022

Weighted-average remaining lease term (in years) 6.1

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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 $ 9.3 million within the next 9 months and then approximately $ 0.6 million per year for 2023, 2024, and 2025.

Firm future purchase commitments under these agreements are approximately $ 8.1 million within the next six 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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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.

With the approval of ZORYVE on July 29, 2022, the tranche B term loans were funded and the Company received $ 125.0 million on August 2, 2022.

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.

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(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 %.

On June 30, 2022, the rate was 8.57 %.

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.

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.

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 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.

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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.

The Company was in compliance with all covenants under the Loan Agreement as of June 30, 2022.

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

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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.

At the inception of the Loan Agreement and through June 30, 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.

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 of 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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

1 unchanged sentence

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

At June 30, 2022, the effective interest rate was 10.64 %.

Interest expense relating to the term loan for the three and six months ended June 30, 2022 was $ 2.0 million and $ 3.8 million, respectively.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Principal loan balance $ 75,000 $ 75,000

8 unchanged sentences

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

As of June 30, 2022, no dividends had been declared by the board of directors.

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Options issued and outstanding 7,270,277 5,757,957

4 unchanged sentences

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 March 31, 2022 and December 31, 2021.

There were no shares of preferred stock outstanding as of June 30, 2022 and December 31, 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

6 unchanged sentences

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.

As of June 30, 2022, the Company had 1,129,763 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.

6 unchanged sentences

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.

The Company began granting out of the 2022 Plan in the first quarter of 2022 and has 649,200 shares available for future grant under the plan as of June 30, 2022.

Stock Option Activity

5 unchanged sentences

Expired ( 4,194 ) $ 27.42

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

Exercisable—March 31, 2022 (1)

Balance—June 30, 2022 7,270,277 $ 19.35 8.35 $ 37,448

Exercisable—June 30, 2022 (1)

3,035,411 $ 14.46 7.37 $ 29,966

1 unchanged sentence

(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 March 31, 2022.

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

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 June 30, 2022.

The intrinsic value of options exercised for the six months ended June 30, 2022 was $ 2.5 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 .

The total grant-date fair value of the options vested during the six months ended June 30, 2022 was $ 13.4 million.

The weighted-average grant-date fair value of employee options granted during the six months ended June 30, 2022 was $ 13.41 .

Restricted Stock Unit Activity

6 unchanged sentences

Forfeited ( 32,700 ) $ 18.23

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

Unvested Balance—June 30, 2022 1,424,578 $ 20.41

The grant date fair value of an RSU equals the closing price of our common stock on the grant date.

3 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Research and development

1 unchanged sentence

General and administrative

4,841 2,228 8,640 9,211

Total stock-based compensation expense

$ 8,096 $ 4,340 $ 14,629 $ 12,843

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.

As of June 30, 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 2.9 years.

As of June 30, 2022, there was $ 25.8 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 3.4 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.

17 unchanged sentences

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:

Three Months Ended March 31, 2022 Year Ended

Six Months Ended June 30, 2022 Year Ended

December 31, 2021

12 unchanged sentences

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 $ 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.

Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $ 37,000 and $ 82,000 as a liability from the early exercise in the accompanying condensed balance sheets as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 2022 and December 31, 2021, there were $ 25,000 and $ 57,000 recorded in accrued liabilities, respectively, and $ 12,000 and $ 25,000 recorded in other long-term liabilities, respectively related to shares that were subject to repurchase.

2020 Employee Stock Purchase Plan

10 unchanged sentences

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 .

As of June 30, 2022, the Company had 1,134,295 shares available for future grant under the ESPP.

Stock-based compensation expense related to the ESPP was $ 212,000 and $ 421,000 for the three and six months ended June 30, 2022, respectively, and $ 99,000 and $ 216,000 for the three and six months ended June 30, 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 March 31,

As of June 30,

Stock options to purchase common stock 7,270,277 5,073,312

Early exercised options subject to future vesting 22,291 185,834

RSU's subject to future vesting 1,259,375 310,068

RSUs subject to future vesting 1,424,578 314,468

ESPP shares subject to future issuance 19,136 8,074

Total 8,736,282 5,581,688

Subsequent Event

On July 29, 2022, the Company received FDA approval of its lead product, ZORYVE, or roflumilast cream, for the treatment of individuals with plaque psoriasis, including intertriginous psoriasis, in individuals 12 years of age and older.

With the approval of ZORYVE, the tranche B term loans became available and were funded on August 2, 2022 in the amount of $ 125.0 million.

Also upon approval, a milestone payment of $ 7.5 million became payable, and a low to high single-digit percentage royalty rate based upon net sales will begin to be paid to AstraZeneca in accordance with our license agreement.

On August 2, 2022, the Company priced a public offering of 8,625,000 shares of its stock at an offering price of $ 20.00 per share, including the underwriters full exercise of their option to purchase an additional 1,125,000 shares.

The aggregate net proceeds to the Company from the offering are expected to be $ 161.7 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

The offering is expected to close on August 5, 2022.

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