What changed in this filing

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Item 1. Financial Statements

2022-11-08 compared with 2022-08-04 · 271 added, 150 removed, 561 unchanged (43% of the section changed)

1 unchanged sentence

ARCUTIS BIOTHERAPEUTICS, INC.

Condensed Balance Sheets

Condensed Consolidated Balance Sheets

(In thousands, except share and par value)

June 30, December 31,

September 30, December 31,

Current assets:

1 unchanged sentence

Restricted cash 1,234 1,542

Trade receivables, net 2,431 —

Marketable securities 395,420 290,610

Inventories 4,307 —

Prepaid expenses and other current assets 11,784 14,172

1 unchanged sentence

Property, plant, and equipment, net 1,939 2,261

Intangible assets, net 7,375 —

Operating lease right-of-use asset 2,803 3,040

14 unchanged sentences

Preferred stock, $ 0.0001 par value;

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;

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

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

Common stock, $ 0.0001 par value;

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

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

60,927,208 and 50,345,755 shares issued at September 30, 2022 and December 31, 2021, respectively;

60,908,641 and 50,255,614 shares outstanding at September 30, 2022 and December 31, 2021, respectively

Additional paid-in capital 920,109 706,233

3 unchanged sentences

Total liabilities and stockholders’ equity $ 508,914 $ 408,152

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Condensed Statements of Operations and Comprehensive Loss

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

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

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

2022 2021 2022 2021

Product revenue, net $ 725 $ — $ 725 $ —

Total revenues 725 — 725 —

Operating expenses:

Cost of sales 269 — 269 —

Research and development 69,731 40,604 148,558 93,000

General and administrative 27,622 11,315 49,628 25,769

Selling, general, and administrative 35,473 16,474 85,101 42,243

Total operating expenses 105,473 57,078 233,928 135,243

5 unchanged sentences

Net loss $ ( 107,709 ) $ ( 56,980 ) $ ( 239,439 ) $ ( 135,030 )

Other comprehensive loss:

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

Other comprehensive income (loss):

Unrealized income (loss) on marketable securities ( 344 ) 18 ( 1,341 ) ( 16 )

Comprehensive loss $ ( 108,053 ) $ ( 56,962 ) $ ( 240,780 ) $ ( 135,046 )

2 unchanged sentences

Weighted-average shares used in computing net loss per share, basic and diluted 57,091,743 50,097,851 53,028,962 49,136,768

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

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

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

(In thousands, except share data)

20 unchanged sentences

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.

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

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

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

(In thousands, except share data)

21 unchanged sentences

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.

Issuance of shares of common stock, net of discount and issuance costs of $ 10,844

— — 8,625,000 1 161,656 — — 161,657

Issuance of shares of common stock related to acquisition of Ducentis Biotherapeutics LTD — — 610,258 — 12,468 — — 12,468

Issuance of common stock upon the exercise of stock options — — 130,817 — 494 — — 494

Issuance of common stock upon the vesting of restricted stock units — — 12,695 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 3,718 — 37 — — 37

Stock-based compensation expense — — — — 8,789 — — 8,789

Unrealized loss on marketable securities — — — — — ( 344 ) — ( 344 )

Net loss — — — — — — ( 107,709 ) ( 107,709 )

Balance—September 30, 2022 — $ — 60,908,641 $ 6 $ 920,109 $ ( 1,596 ) $ ( 647,745 ) $ 270,774

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

ARCUTIS BIOTHERAPEUTICS, INC.

Condensed Statements of Cash Flows

Condensed Consolidated Statements of Cash Flows

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

3 unchanged sentences

Non-cash lease expense 237 234

Amortization of intangible assets 125 —

Acquired in-process research and development 29,630 —

Net amortization/accretion on marketable securities 89 2,569

2 unchanged sentences

Changes in operating assets and liabilities:

Accounts receivable, net ( 2,431 ) —

Inventories ( 4,307 ) —

Prepaid expenses and other current assets 2,299 ( 6,115 )

7 unchanged sentences

Purchases of property and equipment ( 210 ) ( 734 )

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

Acquisition of in-process research and development ( 15,450 ) —

Milestone payment for intangible ( 7,500 ) —

Net cash used in investing activities ( 129,400 ) ( 99,452 )

CASH FLOWS FROM FINANCING ACTIVITIES:

3 unchanged sentences

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

Proceeds from long-term debt 125,000 —

Payment of debt issuance costs ( 2,187 ) —

Net cash provided by financing activities 300,836 209,066

Net increase (decrease) in cash, cash equivalents, and restricted cash ( 35,246 ) 24,046

Net decrease in cash, cash equivalents, and restricted cash ( 15,214 ) ( 13,304 )

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

2 unchanged sentences

Interest expense paid in cash $ 6,923 $ —

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

Acquired in-process research and development in exchange for the issuance of common stock $ 12,468 $ —

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

Organization and Description of Business

1 unchanged sentence

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.

Food and Drug Administration (FDA) approval of its first product, ZORYVE ® (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, and began commercialization in August 2022.

The Company's current portfolio is comprised of highly differentiated topical and systemic 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.

2 unchanged sentences

Initial Public Offering and Follow-On Financings

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.

On February 4, 2020, the Company closed an Initial public offering (IPO) issuing and selling 10,781,250 shares of common stock at a public offering price of $ 17.00 per share, including 1,406,250 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares.

The aggregate net proceeds received by the Company from the offering were approximately $ 167.2 million, after deducting underwriting discounts, commissions, and offering related transaction costs .

5 unchanged sentences

The aggregate net proceeds received by the Company were approximately $ 207.5 million, after deducting underwriting discounts, commissions, and offering related transaction costs.

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.

On August 5, 2022, the Company completed a public offering of 8,625,000 shares of common stock at an offering price of $ 20.00 per share, including 1,125,000 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 $ 161.6 million, after deducting underwriting discounts, commissions, and offering related transaction costs.

At-the-Market Offerings

4 unchanged sentences

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 $ 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.

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 647.7 million and $ 408.3 million as of September 30, 2022 and December 31, 2021, respectively.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 478.2 million and $ 388.6 million as of September 30, 2022 and December 31, 2021, respectively.

Upon FDA approval of ZORYVE, $ 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 has $ 200.0 million outstanding under the Loan Agreement as of September 30, 2022, with an additional $ 25.0 million in funding that may become available subject to the satisfaction of specified conditions.

On August 5, 2022, the Company received net proceeds of approximately $ 161.6 million from a public offering of its common stock.

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

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Basis of Presentation

The Company’s condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S.

The Company’s condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S.

The condensed consolidated financial statements include our wholly-owned subsidiaries.

All material intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed financial statements and accompanying notes.

GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.

On an ongoing basis, management evaluates such estimates and assumptions for continued reasonableness.

In particular, management makes estimates with respect to accruals for research and development activities, fair value of common stock and convertible preferred stock (prior to the IPO completed in January 2020), stock-based compensation expense, and income taxes.

In particular, management makes estimates with respect to revenue recognition, accruals for research and development activities, fair value of common stock and convertible preferred stock (prior to the IPO completed in January 2020), stock-based compensation expense, and income taxes.

Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation.

4 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 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 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.

Unaudited Interim Condensed Consolidated Financial Statements

The interim condensed consolidated balance sheet as of September 30, 2022, the interim condensed consolidated statements of operations and comprehensive loss, and the condensed consolidated changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three and nine months ended September 30, 2022 and 2021 are unaudited.

These unaudited interim condensed consolidated 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 consolidated financial statements related to the three month periods are also unaudited.

The condensed consolidated results of operations for the three and nine months ended September 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 consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S.

GAAP have been condensed or omitted.

Therefore, these unaudited interim condensed financial statements should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021.

Therefore, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021.

Cash and Cash Equivalents

3 unchanged sentences

Restricted Cash

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.

As of September 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

1 unchanged sentence

Management determines the appropriate classification of its investments in fixed income securities at the time of purchase.

Available-for-sale securities with original maturities beyond three months at the date of purchase, including those that have maturity dates beyond one year from the balance sheet date, are classified as current assets on the condensed balance sheets due to their highly liquid nature and availability for use in current operations.

Available-for-sale securities with original maturities beyond three months at the date of purchase, including those that have maturity dates beyond one year from the balance sheet date, are classified as current assets on the condensed consolidated balance sheets due to their highly liquid nature and availability for use in current operations.

Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss).

3 unchanged sentences

The cost of investments sold is based on the specific-identification method.

Unrealized gains and losses on marketable securities are reported as a component of accumulated other comprehensive income (loss) on the condensed balance sheets.

Unrealized gains and losses on marketable securities are reported as a component of accumulated other comprehensive income (loss) on the condensed consolidated balance sheets.

Interest on marketable securities is included in other income, net.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Trade Receivables, net

The Company’s trade accounts receivable consists of amounts due primarily from pharmaceutical wholesalers in the U.S.

(collectively, its "Customers") related to sales of ZORYVE and have standard payment terms.

For certain Customers, the trade accounts receivable for the Customer is net of distribution service fees, prompt pay discounts, and other adjustments.

The Company monitors the financial performance and creditworthiness of its Customers so that it can properly assess and respond to changes in their credit profile.

The Company will reserve against trade accounts receivable for estimated credit losses that may arise and any amounts determined to be uncollectible will be written off against the reserve when it is probable that the receivable will not be collected.

The reserve amount for estimated losses was not material as of September 30, 2022.

The Company values its inventories at the lower-of-cost or net realizable value.

The Company determines the cost of its inventories, which includes costs related to products held for sale in the ordinary course of business, products in process of production for such sale, and items to be currently consumed in the production of goods to be available for sale, on a first-in, first-out (FIFO) basis.

Due to the nature of the Company’s supply chain process, inventory that is owned by the Company is physically stored at third-party warehouses, logistics providers, and contract manufacturers.

The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified.

If they occur, such impairment charges are recorded as a component of cost of sales in the consolidated statements of operations.

The Company capitalizes inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized.

Products which may be used in clinical development programs are excluded from inventory and their costs are charged to research and development expense in the consolidated statement of operations as incurred.

Prior to the initial date regulatory approval is received, costs related to the production of inventory are recorded as research and development expense on the Company’s consolidated statements of operations in the period incurred.

As of September 30, 2022, the Company had inventory, mostly at the raw materials stage, with a value of approximately $ 14.6 million which was previously expensed, which is expected to sell over the next two years.

As a result, cost of sales will reflect a lower average per unit cost of materials over this time period.

Intangible Assets, net

The Company had no intangible assets as of December 31, 2021.

The Company paid a milestone payment of $ 7.5 million to AstraZeneca in the third quarter of 2022 related to the FDA approval and launch of ZORYVE.

This milestone payment was capitalized as an intangible asset and will be amortized to cost of sales over its useful life of 10 years from the date of first commercial sale, as this is the minimum amount of time that the related License Agreement will be in effect.

Amortization expense for the three months ended September 30, 2022 was immaterial.

Estimated future amortization expense for the intangible assets subsequent to September 30, 2022 is as follows:

2022 (October through December) $ 188

Thereafter 4,187

Total amortization $ 7,375

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

The Company evaluates its long-lived assets, including intangibles, for impairment whenever events or changes in circumstance indicate that the carrying value of an asset might not be fully recoverable by comparing the fair value of the intangible asset based on the undiscounted net cash flows over the remaining useful life with its carrying value.

If the fair value is less than the carrying amount, an impairment loss is recognized in operating results.

Concentration of Credit Risk and Other Risks and Uncertainties

1 unchanged sentence

The Company maintains deposits in federally insured financial institutions in excess of federally insured limits.

The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash to the extent recorded on the condensed balance sheets.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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 consolidated 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.

3 unchanged sentences

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.

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

Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

11 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 and six months ended June 30, 2022 and 2021.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

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.

6 unchanged sentences

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

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.

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

Convertible Preferred Stock

Prior to its IPO, the Company classified its outstanding convertible preferred stock outside of stockholders’ equity (deficit) on its condensed balance sheets as the requirements of triggering a deemed liquidation event, as defined within its amended and restated certificate of incorporation, were not entirely within the Company’s control.

Prior to its IPO, the Company classified its outstanding convertible preferred stock outside of stockholders’ equity (deficit) on its condensed consolidated balance sheets as the requirements of triggering a deemed liquidation event, as defined within its amended and restated certificate of incorporation, were not entirely within the Company’s control.

In the event of such a deemed liquidation event, the proceeds from the event were to be distributed in accordance with the liquidation preferences, provided that the holders of convertible preferred stock had not converted their shares into common stock.

2 unchanged sentences

In connection with the IPO in February 2020, the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services.

The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services.

The Company applies the following five-step model in order to determine this amount:

(i) identification of the promised goods or services in the contract;

(ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract;

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that it transfers to the customer.

Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations it must deliver and which of these performance obligations are distinct.

The Company recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied.

Product Revenue, Net

The Company sells its product to its Customers in the United States.

The Company’s Customers subsequently resell the products to pharmacies and health care providers.

In accordance with ASC 606, the Company recognizes net product revenues from sales when the Customers obtain control of the Company’s products, which typically occurs upon delivery to the Customer.

The Company’s payment terms are generally between 31 - 65 days.

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

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

The reserves are classified as reductions to trade receivables, net if payable to a Customer or accrued liabilities if payable to a third-party.

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

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

Actual amounts of consideration ultimately received may differ from the Company’s estimates.

If actual results vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known.

Distribution Service Fees :

The Company engages with wholesalers to distribute its products to end customers.

The Company pays the wholesalers a fee for services such as:

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

The Company estimates the amount of distribution services fees to be paid to the Customers and adjusts the transaction price with the amount of such estimate at the time of sale to the Customer.

Prompt Pay Discounts :

The Company provides its Customers with a percentage discount on their invoice if the Customers pay within the agreed upon timeframe.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Product Returns :

The Company provides Customers a return credit in the amount of the purchase price paid by Customers for all products returned in accordance with the Company’s returned goods policy.

In the initial sales period, the Company estimates its provision for sales returns based on industry data and adjusts the transaction price with such estimate at the time of sale to the Customer.

Once sufficient history has been collected for product returns, the Company will utilize that history to inform its returns estimate.

Once the product is returned, it is destroyed.

The Company does not record a right-of-return asset.

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

The wholesaler tracks these sales and "charges back" the manufacturer for the difference between the negotiated prices paid between the wholesaler's customers and wholesaler's acquisition cost.

The Company estimates the percentage of goods sold that are eligible for chargeback and adjusts the transaction price for such discount at the time of sale to the Customer.

Co-payment Assistance :

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

The Company accrues a liability for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Cost of Sales

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

Cost of sales may also include period costs related to certain inventory warehouse and distribution operations and inventory adjustment charges.

The Company began capitalizing inventory costs upon FDA approval of ZORYVE on July 29, 2022.

As a result, manufacturing and other inventory costs incurred prior to FDA approval of ZORYVE were expensed and, therefore, are not included in cost of sales.

Research and Development

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

Congress enacted the American Rescue Plan Act on March 10, 2021, Families First Coronavirus Response Act (FFCR Act) on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020.

The American Rescue Plan Act is a follow-up to the CARES Act, which continue the emergency economic stimulus package and includes spending and tax breaks to strengthen the U.S.

economy and fund a nationwide effort to curtail the effect of COVID-19.

The American Rescue Plan Act, FFCR Act, and CARES Act include numerous tax-related provisions, including modifications to the limitations on business interest expense and net operating losses (NOLs), certain refundable employee retention credits, as well as a payment delay of employer payroll taxes in 2020 after the date of enactment.

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

11 unchanged sentences

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.

There have been no new accounting pronouncements issued or effective that are expected to have a material impact on the Company's condensed consolidated financial statements.

ARCUTIS BIOTHERAPEUTICS, INC.

2 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):

June 30, 2022

September 30, 2022

Level 1 Level 2 Level 3 Total

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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):

June 30, 2022

September 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 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.

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

As of September 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 September 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.

1 unchanged sentence

Balance Sheet Components

The components of inventory are summarized as follows (in thousands):

September 30, 2022 December 31, 2021

Raw materials $ 3,493 $ —

Work in progress 116 —

Finished goods 698 —

Total inventories $ 4,307 $ —

Prepaid Expenses and Other Current Assets

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

June 30, 2022 December 31, 2021

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

September 30, 2022 December 31, 2021

Prepaid co-pay assistance program $ 1,967 $ —

Prepaid insurance 1,846 518

Prepaid clinical trial costs 454 5,629

Other prepaid expenses and current assets 7,517 8,025

2 unchanged sentences

Accrued liabilities consist of the following (in thousands):

June 30, 2022 December 31, 2021

Clinical trial accruals $ 8,782 $ 13,217

September 30, 2022 December 31, 2021

Accrued compensation $ 11,538 $ 9,130

Clinical trial accruals 9,766 13,217

Accrued sales deductions 853 —

Accrued expenses and other current liabilities 5,640 3,193

2 unchanged sentences

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Computer hardware $ 881 $ 775

1 unchanged sentence

Software 104 104

Construction in process 22 —

Leasehold improvements 1,568 1,568

2 unchanged sentences

Property and equipment, net $ 1,939 $ 2,261

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.

Depreciation expense was $ 157,000 and $ 462,000 for the three and nine months ended September 30, 2022, respectively, and $ 116,000 and $ 318,000 for the three and nine months ended September 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.

2 unchanged sentences

Notes to Condensed Financial Statements

License Agreements

License Agreements & Acquisition

AstraZeneca License Agreement

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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.

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

In the third quarter of 2022, we paid $ 7.5 million to AstraZeneca as a result of the approval of ZORYVE, which was recorded as an intangible asset.

The Company is amortizing the intangible asset to cost of sales over its useful life of 10 years from the date of first commercial sale as this is the minimum amount of time that the related License Agreement will be in effect.

Amortization expense during the three months ended September 30, 2022 was not material.

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.

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.

As a result of the commercialization of ZORYVE in August 2022, the Company began accruing royalties payable to AstraZeneca, which are recorded in cost of sales and accrued liabilities.

Royalty expense during the three months ended September 30, 2022 was not material.

There were no payments made or payable in connection with AZ-Licensed Products for the three and nine months ended September 30, 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Hengrui Exclusive Option and License Agreement

In January 2018, the Company entered into an exclusive option and license agreement, or the Hengrui License Agreement, with Jiangsu Hengrui Medicine Co., Ltd.

(Hengrui), whereby Hengrui granted the Company an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a Janus kinase type 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Japan, Canada, and the European Union (including for clarity the United Kingdom).

(Hengrui), whereby Hengrui granted the Company an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a Janus kinase (JAK) type 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Japan, Canada, and the European Union (including for clarity the United Kingdom).

The Company made a $ 0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement, which was recorded as research and development expense.

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In addition, the Company has agreed to make cash payments of up to an aggregate of $ 20.5 million upon achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $ 200.0 million in sales-based milestones based on certain aggregate annual net sales volumes with respect to a licensed product.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

With respect to any products the Company commercializes under the Hengrui License Agreement, it will pay tiered royalties to Hengrui on net sales of each licensed product by the Company, or its affiliates, or its sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions.

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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.

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

Hawkeye (Iolyx Therapeutics) Collaboration Agreement

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The Company determined that Hawkeye is a VIE for which consolidation is not required as it is not the primary beneficiary.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Ducentis Biotherapeutics LTD Acquisition

On September 7, 2022, the Company entered into a Share Purchase Agreement with Ducentis Biotherapeutics LTD (Ducentis), pursuant to which the Company acquired (the “Acquisition”) all of the outstanding equity interests in Ducentis for (i) 610,258 shares of the Company common stock valued at approximately $ 12.5 million and $ 15.9 million in cash, inclusive of liabilities acquired, and (ii) contingent payments, the amount of which is indeterminable until achieved, which may become payable upon the achievement of certain development, regulatory, and commercial milestones.

The Company currently estimates that these contingent payments may be up to an aggregate of approximately $ 400 million (although the actual amount may differ depending on whether the applicable milestones are achieved).

In addition, if applicable, the Company will make payments amounting to a mid-single-digit percentage of any annual net sales of Ducentis’s products exceeding $ 1.5 billion.

As of September 30, 2022, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying unaudited condensed consolidated financial statements with respect to these contingent payments.

Under the terms of the Share Purchase Agreement, the Company will develop and seek FDA approval of a therapeutic product containing Ducentis’s DS-234 product candidate, now ARQ-234, for an atopic dermatitis indication, and if FDA approval of ARQ-234 is obtained by the Company, to launch it in the United States.

The Company accounted for this purchase as an asset acquisition as substantially all of the fair value of the gross assets acquired was concentrated in a single identifiable asset, in-process research and development (“IPR&D”).

The IPR&D asset has no alternative future use and relates to intellectual property rights related to ARQ-234.

In addition to the $ 12.5 million value of stock issued and cash paid of $ 15.9 million, including $ 1.2 million allocated to to liabilities acquired, the Company also incurred $ 1.2 million in transaction costs related to the Acquisition.

As such, during the third quarter of 2022, the Company recorded a charge to research and development expense in the amount of $ 29.6 million.

Commitments and Contingencies

6 unchanged sentences

The renewal and one-time cancellation options have not been considered in the determination of the ROU asset or lease liability as the Company did not consider it reasonably certain it would exercise these options.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

The lease is subject to fixed rate escalation increases with an initial base rent of $ 76,000 per month, and includes rent free periods aggregating approximately one year .

6 unchanged sentences

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 June 30, 2022 are as follows (in thousands):

2022 (July through December) $ 430

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

2022 (October through December) $ 234

Thereafter 1,740

5 unchanged sentences

Total operating lease liability $ 4,924

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.

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 six months ended June 30, 2022 and 2021.

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

Six Months Ended June 30,

Straight-line rent expense recognized for operating leases was $ 186,000 and $ 530,000 for the three and nine months ended September 30, 2022, respectively, and $ 171,000 and $ 516,000 for the three and nine months ended September 30, 2021, respectively.

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

Nine Months Ended September 30,

Cash flows from operating activities

1 unchanged sentence

The following summarizes additional information related to the operating lease:

June 30, 2022

September 30, 2022

Weighted-average remaining lease term (in years) 5.8

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 $ 8.1 million within the next six months and then approximately $ 0.6 million per year for 2023, 2024, and 2025.

Firm future purchase commitments under these agreements are approximately $ 2.9 million within the next three months, and then approximately $ 2.1 million for 2023, and approximately $ 0.6 million per year for 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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Indemnification

16 unchanged sentences

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).

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.

4 unchanged sentences

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

On September 30, 2022, the rate was 10.08 %.

The maturity date for each term loan is January 1, 2027.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Commencing on February 1, 2022, interest payments are payable monthly following the funding of any Term Loan.

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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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

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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 June 30, 2022.

The Company was in compliance with all covenants under the Loan Agreement as of September 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.

2 unchanged sentences

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 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.

At the inception of the Loan Agreement and through September 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.

1 unchanged sentence

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 $ 13.7 million is recognized over the life of the term loan through interest expense.

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.

At September 30, 2022, the effective interest rate was 12.59 %.

Interest expense relating to the term loan for the three and nine months ended September 30, 2022 was $ 4.9 million and $ 8.7 million, respectively.

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

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Principal loan balance $ 200,000 $ 75,000

2 unchanged sentences

Long-term debt, net $ 196,753 $ 72,350

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Convertible Preferred Stock and Stockholders’ Equity

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

As of September 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:

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Options issued and outstanding 7,480,040 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 June 30, 2022 and December 31, 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

Stock-Based Compensation

4 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 June 30, 2022, the Company had 1,129,763 shares available for future grant under the 2020 Plan.

As of September 30, 2022, the Company had 1,061,783 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.

4 unchanged sentences

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 649,200 shares available for future grant under the plan as of June 30, 2022.

The Company began granting out of the 2022 Plan in the first quarter of 2022 and has 257,500 shares available for future grant under the plan as of September 30, 2022.

Stock Option Activity

5 unchanged sentences

Expired ( 4,413 ) $ 26.93

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

Exercisable—June 30, 2022 (1)

Balance—September 30, 2022 7,480,040 $ 19.90 8.22 $ 28,324

Exercisable—September 30, 2022 (1)

3,323,627 $ 15.87 7.33 $ 24,854

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 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 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 .

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, 2022.

The intrinsic value of options exercised for the nine months ended September 30, 2022 was $ 5.1 million.

The total grant-date fair value of the options vested during the nine months ended September 30, 2022 was $ 20.2 million.

The weighted-average grant-date fair value of employee options granted during the nine months ended September 30, 2022 was $ 14.13 .

Restricted Stock Unit Activity

6 unchanged sentences

Forfeited ( 37,300 ) $ 18.47

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

Unvested Balance—September 30, 2022 1,567,946 $ 20.81

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

1 unchanged sentence

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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 June 30, Six Months Ended June 30,

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

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

2022 2021 2022 2021

1 unchanged sentence

$ 3,448 $ 2,266 $ 9,437 $ 5,898

General and administrative

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

Selling, general, and administrative 5,341 3,097 13,981 12,308

Total stock-based compensation expense

$ 8,789 $ 5,363 $ 23,418 $ 18,206

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.

As of September 30, 2022, there was $ 64.6 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 2.8 years.

As of September 30, 2022, there was $ 27.6 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 3.3 years.

In March 2021, in connection with the retirement of the former Chief Financial Officer, the Company modified the terms of this individual’s historical stock awards.

As a result of the modifications, the Company recognized approximately $ 5.3 million of incremental stock-based compensation expense during the period, which is included in general and administrative expenses.

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 selling, 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.

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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.

7 unchanged sentences

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:

Six Months Ended June 30, 2022 Year Ended

Nine Months Ended September 30, 2022 Year Ended

December 31, 2021

11 unchanged sentences

While such shares have been issued, they are not considered outstanding for accounting purposes until they vest and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature.

The liability is reclassified into common stock and additional paid-in capital as the shares vest and the repurchase right lapses.

Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $ 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.

Prior to September 30, 2022, the liability was reclassified into common stock and additional paid-in capital as the shares vested and the repurchase right lapsed.

Accordingly, the Company recorded the unvested portion of the exercise proceeds of $ 82,000 as a liability from the early exercise in the accompanying condensed consolidated balance sheets as of December 31, 2021.

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

No amounts were recorded as a liability as of September 30, 2022 as the amounts were immaterial.

2020 Employee Stock Purchase Plan

3 unchanged sentences

The option purchase price will be the lower of 85 % of the closing trading price per share of the Company’s common stock on the first trading date of an offering period in which a participant is enrolled or 85 % of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

The ESPP is intended to qualify under Section 423 of the U.S.

3 unchanged sentences

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

As of September 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 $ 216,000 and $ 637,000 for the three and nine months ended September 30, 2022, respectively, and $ 88,000 and $ 304,000 for the three and nine months ended September 30, 2021, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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 June 30,

As of September 30,

Stock options to purchase common stock 7,480,040 5,715,147

3 unchanged sentences

Total 9,122,294 6,207,572

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