What changed in this filing

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Item 9A. Controls and Procedures

2023-02-28 compared with 2022-02-22 · 309 added, 197 removed, 851 unchanged (37% of the section changed)

8 unchanged sentences

The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by an independent registered public accounting firm, as stated in their report included in Part IV Item 15, “Exhibits, Financial Statement Schedules” of this Annual Report on Form 10-K.

Index to Financial Statements

Changes in Internal Control over Financial Reporting

1 unchanged sentence

Inherent Limitations on Effectiveness of Controls and Procedures

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S.

Our internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

Index to Financial Statements

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.

11 unchanged sentences

We have audited Arcutis Biotherapeutics, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria).

In our opinion, Amgen Inc.

In our opinion, Arcutis Biotherapeutics, Inc.

(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of the Company as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 22, 2022 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 28, 2023 expressed an unqualified opinion thereon.

Basis for Opinion

35 unchanged sentences

The following financial statements are included herein:

Audited Financial Statements

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm (PCAOB ID:

Balance Sheets

Statements of Operations and Comprehensive Loss

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

Statements of Cash Flows

Notes to Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Loss

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

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Index to Financial Statements

2 unchanged sentences

3.1 Restated Certificate of Incorporation.

S-1/A 1/21/20 3.2

10-Q 5/12/20 3.1

3.2 Restated Bylaws.

S-1/A 1/21/20 3.4

10-Q 5/12/20 3.2

4.1 Form of Common Stock Certificate.

13 unchanged sentences

10.5# 2022 Employment Inducement Incentive Plan and forms of award agreements.

10-K 2/22/22 10.5

10.6# Offer Letter, dated January 9, 2020, by and between the Registrant and Todd Franklin Watanabe.

47 unchanged sentences

10-Q 5/6/21 10.1

10.28†^ Amendment No.

1, dated October 5, 2022, to the Supply Agreement, dated November 24, 2020, by and among the Registrant and Interquim, S.A.

10-Q 11/8/22 10.2

10.29 Severance & Change in Control Agreement, by and between the Registrant and Scott L.

6 unchanged sentences

10.32 Offer Letter, dated December 13, 2021, by and between the Registrant and Mas Matsuda.

10-K 2/22/22 10.31

10.33 Severance & Change in Control Agreement, by and between the Registrant and Mas Matsuda.

10.33^ Loan and Security Agreement, dated December 22, 2021, by and among the Registrant, SLR Investment Corp.

10-K 2/22/22 10.32

10.34† Share Purchase Agreement, dated September 7, 2022, by and among the Registrant, Ducentis Biotherapeutics LTD and the certain stockholders of Ducentis Biotherapeutics LTD.

10-Q 11/8/22 10.1

10.35^ Amended and Restated Loan and Security Agreement, dated January 10, 2023 , by and among the Registrant, SLR Investment Corp.

and the lenders party thereto.

10.36 Non-Employee Director Compensation Program

10.37 Form of Non-Employee Director RSU Deferral Election

23.1 Consent of Independent Registered Public Accounting Firm.

4 unchanged sentences

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Index to Financial Statements

101.INS Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

4 unchanged sentences

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

Index to Financial Statements

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

9 unchanged sentences

To the Stockholders and the Board of Directors of Arcutis Biotherapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Arcutis Biotherapeutics, Inc.

(the Company) as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Arcutis Biotherapeutics, Inc.

(the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, convertible preferred stock and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022 and the related notes (collectively referred to as the “financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S.

generally accepted accounting principles.

19 unchanged sentences

As of December 31, 2022, the Company recorded $7.4 million for accrued clinical trial costs.

As described in Note 2 to the financial statements, the Company records accrued liabilities for estimated costs of clinical trial research and development activities conducted by third-party clinical research organizations (CROs).

As described in Note 2 to the consolidated financial statements, the Company records accrued liabilities for estimated costs of clinical trial research and development activities conducted by third-party clinical research organizations (CROs).

The Company accrues for these costs based on factors such as patient enrollment, estimates of the work completed as patients progress through the trials, and the related costs for the research activities in accordance with terms established with its third-party service providers under the respective service agreements.

12 unchanged sentences

ARCUTIS BIOTHERAPEUTICS, INC.

Balance Sheets

Consolidated Balance Sheets

(In thousands, except share and par value)

3 unchanged sentences

Marketable securities 355,948 290,610

Trade receivables, net 8,458 —

Inventory 7,514 —

Prepaid expenses and other current assets 10,611 14,172

1 unchanged sentence

Property and equipment, net 1,881 2,261

Intangible assets, net 7,188 —

Operating lease right-of-use asset 2,721 3,040

25 unchanged sentences

Total liabilities and stockholders’ equity $ 449,274 $ 408,152

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

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

Index to Financial Statements

ARCUTIS BIOTHERAPEUTICS, INC.

Statements of Operations and Comprehensive Loss

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

1 unchanged sentence

2022 2021 2020

Product revenue, net $ 3,686 $ — $ —

Total revenues 3,686 — —

Operating expenses:

Cost of sales 754 — —

Research and development

182,435 145,558 115,308

General and administrative

60,971 21,337 6,610

Selling, general and administrative 122,124 60,971 21,337

Total operating expenses

2 unchanged sentences

( 301,627 ) ( 206,529 ) ( 136,645 )

Other income (expense):

Other income, net 5,821 173 967

Interest expense ( 15,652 ) — —

Total other income (expense) ( 9,831 ) 173 967

$ ( 311,458 ) $ ( 206,356 ) $ ( 135,678 )

6 unchanged sentences

Weighted-average shares used in computing net loss per share, basic and diluted 55,032,265 49,405,575 35,668,152

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

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

Index to Financial Statements

ARCUTIS BIOTHERAPEUTICS, INC.

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

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

(In thousands, except share data)

4 unchanged sentences

Balance—December 31, 2019 24,385,388 $ 166,491 2,120,853 $ — $ 1,244 $ ( 1 ) $ ( 66,272 ) $ ( 65,029 )

Issuance of Series C convertible preferred stock, net of issuance costs of $ 262

Conversion of preferred stock into common stock upon initial public offering ( 24,385,388 ) ( 166,491 ) 24,385,388 2 166,489 — — 166,491

Issuance of shares of common stock for initial public offering, net of issuance costs of $ 16,040

— — 10,781,250 1 167,240 — — 167,241

Issuance of shares of common stock for public offering, net of issuance costs of $ 6,640

— — 4,000,000 — 93,360 — — 93,360

Issuance of shares of common stock for private placement — — 1,400,000 — 35,000 — — 35,000

Issuance of common stock upon the exercise of stock options — — 140,226 — 430 — — 430

Issuance of common stock upon the vesting of restricted stock awards — — 13,245 — 8 — — 8

Vesting of founder shares subject to repurchase — — 137,863 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 338,670 1 246 — — 247

Shares issued pursuant to the ESPP — — 34,188 — 617 — — 617

Stock-based compensation expense — — — — 7,943 — — 7,943

2 unchanged sentences

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

Conversion of preferred stock into common stock upon initial public offering ( 24,385,388 ) ( 166,491 ) 24,385,388 2 166,489 — — 166,491

Issuance of shares of common stock for initial public offering, net of issuance costs of $ 16,040

— — 10,781,250 1 167,240 — — 167,241

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

— — 6,325,000 1 207,489 — — 207,490

Issuance of shares of common stock for private placement — — 1,400,000 — 35,000 — — 35,000

Issuance of common stock upon the exercise of stock options — — 257,060 — 1,265 — — 1,265

Vesting of founder shares subject to repurchase — — 137,863 — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 338,670 1 246 — — 247

Shares issued pursuant to the employee stock purchase plan — — 34,188 — 617 — — 617

Issuance of common stock upon the vesting of restricted stock units — — 37,362 — — — — —

Lapse of repurchasing rights related to common stock issued pursuant to early exercises — — 249,239 — 176 — — 176

Shares issued pursuant to the ESPP — — 48,515 — 842 — — 842

Stock-based compensation expense — — — — 23,892 — — 23,892

2 unchanged sentences

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

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

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

— — 882,353 — 14,366 — — 14,366

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 the acquisition of Ducentis Biotherapeutics — — 610,258 — 12,468 — — 12,468

Issuance of common stock upon the exercise of stock options — — 331,890 — 1,016 — — 1,016

1 unchanged sentence

Lapse of repurchasing rights related to common stock issued pursuant to early exercises — — 75,293 — 82 — — 82

Shares issued pursuant to the employee stock purchase plan — — 48,515 — 842 — — 842

Shares issued pursuant to the ESPP — — 138,821 — 1,922 — — 1,922

Stock-based compensation expense — — — — 32,682 — — 32,682

2 unchanged sentences

Balance—December 31, 2022 — $ — 61,037,403 $ 6 $ 930,425 $ ( 1,086 ) $ ( 719,764 ) $ 209,581

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

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

Index to Financial Statements

ARCUTIS BIOTHERAPEUTICS, INC.

Statements of Cash Flows

Consolidated Statements of Cash Flows

(In thousands)

6 unchanged sentences

Non-cash lease expense 319 309 333

Amortization of intangible assets 312 — —

Acquired in-process research and development 29,630 — —

Net amortization/accretion on marketable securities ( 2,253 ) 3,454 72

Non-cash interest expense 2,606 — —

Stock-based compensation 32,682 23,892 7,943

1 unchanged sentence

Changes in operating assets and liabilities:

Accounts receivable, net ( 8,458 ) — —

Inventories ( 7,514 ) — —

Prepaid expenses and other current assets 3,472 ( 7,329 ) ( 3,412 )

Other assets — — ( 47 )

Accounts payable 1,565 245 5,674

6 unchanged sentences

Purchases of property and equipment ( 333 ) ( 995 ) ( 321 )

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

Milestone payment for intangible asset ( 7,500 ) —

Net cash used in investing activities ( 87,199 ) ( 75,953 ) ( 181,824 )

1 unchanged sentence

Proceeds from issuance of common stock upon exercise of stock options 1,016 1,265 526

Proceeds from issuance of convertible preferred stock, net of issuance costs — — 94,239

Proceeds from issuance of shares under ATM, net of issuance costs 14,455 — —

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

Proceeds from issuance of common stock, net of issuance costs 161,592 207,490 128,360

Proceeds from issuance of common stock for ESPP purchase 842 617 —

Payment of financing costs — — ( 1,401 )

Proceeds from long-term debt, net 73,987 — —

Debt issuance costs ( 1,637 ) — —

Proceeds from issuance of common stock for ESPP 1,922 842 617

Proceeds from long-term debt 125,000 73,987 —

Payment of debt issuance costs ( 2,187 ) ( 1,637 ) —

Net cash provided by financing activities 301,798 281,947 298,145

Net increase in cash, cash equivalents and restricted cash 31,367 3,288 23,942

Net (decrease) increase in cash, cash equivalents and restricted cash ( 43,116 ) 31,367 3,288

Cash, cash equivalents and restricted cash at beginning of period 97,991 66,624 63,336

2 unchanged sentences

Interest expense paid in cash $ 12,636 $ 142 $ —

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

Conversion of preferred stock to common stock and APIC $ — $ — $ 166,491

1 unchanged sentence

Reduction in right-of-use asset upon reassessment of lease term $ — $ — $ 123

Deferred financing costs included in accounts payable and accrued liabilities $ — $ — $ 346

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Notes to Consolidated Financial Statements

Organization and Description of Business

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

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

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 ® (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.

1 unchanged sentence

The Company believes this strategy uniquely positions it to rapidly advance its goal of bridging the treatment innovation gap in dermatology, while maximizing its probability of technical success.

On January 17, 2020, the Company's board of directors approved a 1-for-2.0007 reverse stock split of the Company’s capital stock and the Company filed a certificate of amendment to its restated certificate of incorporation to effect the split.

The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse split.

All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse stock split.

Initial Public Offering and Follow-On Financings

5 unchanged sentences

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.

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 (ATM) Offerings

1 unchanged sentence

Cowen will act as the Company's sales agent for the ATM program and is entitled to compensation for its services equal to 3 % of the gross proceeds of any shares of common stock sold under the Sales Agreement.

The Company has not yet issued or sold any shares of common stock through the ATM program.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Debt Financing

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

The lenders agreed to extend term loans to the Company in an aggregate principal amount of up to $ 225.0 million, of which $ 75.0 million has been funded and is outstanding, and up to $ 150.0 million in additional funding may become available subject to the satisfaction of specified conditions.

Notes to Consolidated Financial Statements

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 719.8 million and $ 408.3 million as of December 31, 2022 and 2021, respectively.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 410.8 million and $ 388.6 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2021, the Company had $ 75.0 million outstanding under the Loan Agreement and has an aggregate of up to $ 150.0 million in additional funding that may become available subject to the satisfaction of specified conditions.

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

After this draw down, the Company has $ 200.0 million outstanding under the Loan Agreement as of December 31, 2022, with an additional $ 25.0 million in funding that may become available subject to the satisfaction of specified conditions.

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

In March 2022, the Company received net proceeds of $ 14.5 million from the sale of stock under our ATM facility.

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

Management expects operating losses to continue for the foreseeable future.

Management expects to continue to incur operating losses.

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 and marketable securities 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.

1 unchanged sentence

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

The Company is monitoring the impact COVID-19 may have on the clinical development of its product candidates, including potential delays or modifications to its ongoing and planned trials, as well as its planned commercial activities.

The Company believes that the rapid spread of the Omicron variant in late 2021 and early 2022 has likely had a minor impact on the enrollment of our clinical trials.

Because of this likely impact, along with the inherent challenges of enrolling young children in clinical trials, we have updated our expectation for providing topline data for the INTEGUMENT-PED trial, in atopic dermatitis subjects between two and five years of age, to 2023.

The Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its financial condition and operations, including ongoing and planned clinical trials.

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.

Summary of Significant Accounting Policies

Basis of Presentation

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

The Company’s 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.

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

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

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

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

In particular, management makes estimates with respect to revenue recognition, accruals for research and development activities, stock-based compensation expense, and income taxes.

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

1 unchanged sentence

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

JOBS Act Accounting Election

Effective December 31, 2021, the Company is no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act) because of an increase in its market capitalization.

Prior to losing this status as an emerging growth company, the JOBS Act allowed the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements were made applicable to private companies, and the Company had elected to use this extended transition period.

The Company can no longer take advantage of this extended transition period.

Notes to Consolidated 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.

5 unchanged sentences

Restricted Cash

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

As of December 31, 2022 and 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 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 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 balance sheets.

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

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

Trade Receivables, net

The Company’s trade accounts receivable consists of amounts due primarily from pharmaceutical wholesalers and specialty pharmacy providers in the United States (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 December 31, 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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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 December 31, 2022, the Company had inventory, mostly at the raw materials stage, with a value of approximately $ 14.1 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 year ended December 31, 2022 was immaterial.

Estimated future amortization expense for the intangible assets subsequent to December 31, 2022 is as follows:

Thereafter 3,438

Total amortization $ 7,188

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 balance sheets.

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 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 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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

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

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

Notes to Consolidated Financial Statements

transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

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Property and equipment are stated at cost less accumulated depreciation.

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

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

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

1 unchanged sentence

The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

There were no impairments recognized during the years ended December 31, 2021 and 2020.

There were no impairments recognized during the years ended December 31, 2022, 2021 or 2020.

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

11 unchanged sentences

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Notes to Consolidated Financial Statements

Nonclinical and Clinical Accruals and Costs

6 unchanged sentences

Convertible Preferred Stock

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

Prior to its IPO, the Company classified its outstanding convertible preferred stock outside of stockholders’ equity (deficit) on its 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.

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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.

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, health care providers, and patients.

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 payer 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-

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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.

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 for 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 our 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 records contra-revenue expense 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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Such payments are evaluated for current or long-term classification based on when they will be realized.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The Company has entered into, and may continue to enter into, license agreements to access and utilize certain technology.

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The Company accounts for forfeitures as they occur.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Income taxes are accounted for using the asset and liability method.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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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.

On June 29, 2020, the California State Assembly Bill 85 (Trailer Bill) was enacted which suspends the use of California NOL deductions and certain tax credits, including research and development credits, for the 2020, 2021, and 2022 tax years.

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

Variable Interest Entities

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In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity.

If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s financial statements.

If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s consolidated financial statements.

The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

The Company currently does not consolidate any VIEs.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Net Loss Per Share

4 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 financial statements.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

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

Fair Value Measurements

12 unchanged sentences

Commercial paper — 119,413 — 119,413

Corporate debt securities — 114,324 — 114,324

Treasury securities 58,177 — — 58,177

2 unchanged sentences

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Money market funds and U.S.

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$ 53,641 $ — $ — $ 53,641

Corporate debt securities 1,304 — — 1,304

Total cash and cash equivalents $ 53,641 $ — $ — $ 53,641

6 unchanged sentences

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

December 31, 2021

5 unchanged sentences

$ 95,145 $ — $ — $ 95,145

Corporate debt securities 1,304 — — 1,304

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

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

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

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

5 unchanged sentences

As of December 31, 2022 and 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.

Notes to Consolidated Financial Statements

Balance Sheet Components

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

Raw materials $ 5,659 $ —

Work in progress 395 —

Finished goods 1,460 —

Total inventories $ 7,514 $ —

Prepaid Expenses and Other Current Assets

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

Prepaid clinical trial costs $ 5,629 $ 4,865

Prepaid co-pay assistance program $ 3,226 $ —

Prepaid insurance 956 518

Tax credits 362 510

Prepaid clinical trial costs 172 5,629

Other prepaid expenses and current assets 6,257 8,025

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Accrued liabilities consist of the following (in thousands):

Clinical trial accruals $ 13,217 $ 9,754

Accrued compensation $ 14,000 $ 9,130

Clinical trial accruals 7,896 13,217

Accrued sales deductions 1,567 —

Accrued expenses and other current liabilities 4,860 3,193

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ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Notes to Consolidated Financial Statements

Property and Equipment, net

3 unchanged sentences

Software 104 104

Construction in process — 298

Leasehold improvements 1,568 1,568

2 unchanged sentences

Property and equipment, net $ 1,881 $ 2,261

Depreciation expense was $ 454,000 , $ 122,000 , and $ 68,000 for the years ended December 31, 2021, 2020, and 2019 respectively.

Depreciation expense was $ 0.6 million, $ 0.5 million, and $ 0.1 million for the years ended December 31, 2022, 2021, and 2020 respectively.

Leasehold improvements are depreciated over the term of the lease, which is the shorter of the improvements' expected useful lives and the lease term.

All other fixed asset depreciation is recorded using the straight-line method over the estimated useful lives of the assets ( two to five years ).

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 topical roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product, which was recorded in research and development expense.

The Company has agreed to make additional cash payments to AstraZeneca of up to an aggregate of $ 12.5 million upon the achievement of specified regulatory approval milestones with respect to the AZ-Licensed Products, which includes $ 7.5 million upon FDA approval of the Company's first product, and payments up to an additional aggregate amount of $ 15.0 million upon the achievement of certain aggregate worldwide net sales milestones.

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 year ended December 31, 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.

There were no payments made or due in connection with AZ-Licensed Products for the years ended December 31, 2021 and 2020.

As a result of the commercialization of ZORYVE in August 2022, the Company began accruing royalties payable to

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Notes to Consolidated Financial Statements

AstraZeneca, which are recorded in cost of sales and accrued liabilities, Royalty expense during the year ended December 31, 2022 was not material.

There were no payments made or payable in connection with AZ-Licensed Products for the years ended December 31, 2021 and 2020.

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 ivarmacitinib, a Janus kinase type 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Japan, Canada, and the European Union (including for clarity the United Kingdom).

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

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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.

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 years ended December 31, 2022, 2021, and 2020.

Hawkeye Collaboration Agreement

Hawkeye (lolyx Therapeutics) Collaboration Agreement

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

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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 Consolidated 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 December 31, 2022, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying 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 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.

The acquired IPR&D expense was not tax deductible.

Commitments and Contingencies

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The Company leases a facility in Westlake Village, California under an operating lease that commenced in February 2019 and was amended in April 2020 in order to relocate to a new expanded space comprising 22,643 square feet.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

The Company recognized the ROU asset and lease liability for the new space on May 1, 2020.

8 unchanged sentences

The amended lease agreement also required the Company to have an available letter of credit of $ 1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met.

Accordingly, in November 2020, the Company entered into a letter of credit for $ 1.5 million, which it secured with a restricted cash account in the same amount.

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

Accordingly, in November 2020, the Company entered into a letter of credit for $ 1.5 million,

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

which it secured with a restricted cash account in the same amount.

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

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

The annual rental payments of the Company’s operating lease liability as of December 31, 2021 are as follows (in thousands):

Thereafter 1,740

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

Total minimum lease payments $ 5,777

6 unchanged sentences

There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the years ended December 31, 2022, 2021, and 2020.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

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

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

2022 2021 2020

6 unchanged sentences

Manufacturing Agreements

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

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

Firm future purchase commitments under these agreements are approximately $ 3.5 million for 2023 and $ 0.7 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 Consolidated Financial Statements

Indemnification

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

License Agreements

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

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

Long-term debt

3 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).

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.

8 unchanged sentences

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

obligations that are due and payable, including expenses and interest at the Default Rate (as defined below) with respect to any past due amounts.

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

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The Company was in compliance with all covenants under the Loan Agreement as of December 31, 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

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

6 unchanged sentences

Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement.

As of December 31, 2021, the carrying value of the Term Loans consists of $ 75.0 million principal outstanding less the debt issuance costs of approximately $ 2.7 million, including the closing fee.

The debt issuance costs have been recorded as a debt discount which are being accreted to interest expense through the maturity date of the term loan.

1 unchanged sentence

The final maturity payment of $ 13.9 million is recognized over the life of the term loan through interest expense.

As of December 31, 2021 the amortization of the deferred final fee and debt issuance costs was not material.

At December 31, 2022, the effective interest rate was 13.79 %.

Interest expense relating to the term loan for the year ended December 31, 2021 was $ 140,000 .

As of December 31, 2020 the Company had no outstanding long-term debt.

Interest expense relating to the term loan was $ 15.7 million for the year ended December 31, 2022, and immaterial for the year ended December 31, 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The following summarizes additional information related to our long-term debt (in thousands):

Long-term debt, gross $ 200,000 $ 75,000

Deferred final fee ( 5,213 )

Debt issuance costs ( 2,650 )

Accrued final fee 1,871 —

Unamortized debt issuance costs ( 4,102 ) ( 2,650 )

Long-term debt, net $ 197,769 $ 72,350

The contractual maturities of our long term debt related to principal and final fees is $ 213.9 million and is due January 1, 2027.

Convertible Preferred Stock and Stockholders’ Equity

5 unchanged sentences

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

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

8 unchanged sentences

In January 2020, the Company’s board of directors approved the 2020 Equity Incentive Plan (2020 Plan), which became effective January 30, 2020 in connection with the IPO.

The 2020 Plan serves as the successor incentive award plan to the Company’s 2017 Equity Incentive Plan (2017 Plan) and has 2,134,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit (RSU) awards, and other stock-based awards, plus 1,550,150 shares of common stock that were reserved for issuance pursuant to future awards under the 2017 Plan at the time the 2020 Plan became effective, plus shares represented by awards outstanding under the 2017 Plan that are forfeited or lapsed unexercised and which following the effective date of the 2020 Plan are not issued under the 2017 Plan.

The 2020 Plan serves as the successor incentive award plan to the Company’s 2017 Equity Incentive Plan (2017 Plan) and initially reserved 2,134,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit (RSU) awards, and other stock-based awards, plus 1,550,150 shares of common stock that were reserved for issuance pursuant to future awards under the 2017 Plan at the time the 2020 Plan became effective, plus shares represented by awards outstanding under the 2017 Plan that are forfeited or lapsed unexercised and which following the effective date of the 2020 Plan are not issued under the 2017 Plan.

In addition, the 2020 Plan reserve will increase on January 1 of each year beginning in 2021 through 2030, by an amount equal to the lesser of (a) four percent of the shares of stock outstanding (on an as converted basis) on the day immediately prior to the date of increase and (b) such smaller number of shares of stock as determined by our board of directors;

provided, however, that no more than 11,000,000 shares of stock may be issued upon the exercise of incentive stock options.

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

Accordingly, on January 1,

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

2023, 2022 and 2021, the plan reserve increased by 2,442,090 , 2,013,830 and 1,747,112 shares, respectively.

As of December 31, 2022, the Company had 1,048,775 shares available for future grant under the 2020 Plan.

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In December 2021, the Company’s board of directors approved the 2022 Employment Inducement Incentive Plan (2022 Plan).

The 2022 Plan has 1,250,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, RSU awards, and other stock-based awards.

No awards have been made out of this plan as of December 31, 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

The 2022 Plan initially reserved 1,250,000 shares of common stock 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.

In November 2022, the plan reserve was increased by 1,500,000 .

As of December 31, 2022, the Company had 1,665,900 shares available for future grant under the plan.

Stock Option Activity

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The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2022.

As of December 31, 2020, prior to the Company's IPO in January 2020, the estimated fair value of the Company's common stock was determined by the board of directors.

The intrinsic value of options exercised for the year ended December 31, 2022 was $ 5.6 million.

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The following table summarizes information regarding our RSUs:

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Number of Units Weighted-Average

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Stock-Based Compensation Expense

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$ 13,034 $ 8,478 $ 3,503

General and administrative

15,414 4,440 473

Selling, general and administrative 19,648 15,414 4,440

Total stock-based compensation expense

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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.

Each of these inputs is subjective and generally requires significant judgment.

Fair value of common stock— For options granted prior to IPO in the year ended December 31, 2019, given the absence of a public trading market, the Company’s board of directors with input from management considered numerous objective and subjective factors to determine the fair value of common stock.

The factors included, but were not limited to:

(i) third-party valuations of the Company’s common stock;

(ii) the Company’s stage of development;

(iii) the status of research and development efforts;

(iv) the rights, preferences, and privileges of the Company’s convertible preferred stock relative to those of the Company’s common stock;

(v) the Company’s operating results and financial condition, including the Company’s levels of available capital resources;

(vi) equity market conditions affecting comparable public companies;

(vii) general U.S.

market conditions;

and (viii) the lack of marketability of the Company’s common stock.

For options granted after IPO, the Company uses its closing stock price as reported on Nasdaq on the grant date for the fair value of its stock.

Fair value of common stock— The Company uses its closing stock price as reported on Nasdaq on the grant date for the fair value of its stock.

Expected Term —The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding.

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

Expected Volatility —The Company does not yet have sufficient trading history for its common stock to solely use its own historical volatility.

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

Expected Volatility —Prior to 2022, the Company did not yet have sufficient trading history for its common stock to solely use its own historical volatility.

Therefore, the expected volatility was estimated based on a combination of its own historical common stock volatility as well as the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants.

The comparable companies were chosen based on their similar size, stage in the life cycle, and area of specialty.

The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

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

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

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

Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Dividend Yield —The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

The fair value of stock option awards granted was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions:

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

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

Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $ 82,000 and $ 258,000 as a liability from the early exercise in the accompanying balance sheets as of December 31, 2021 and 2020, respectively.

As of December 31, 2021 and 2020, there were $ 57,000 and $ 176,000 recorded in accrued liabilities, respectively, and $ 25,000 and $ 82,000 recorded in other long-term liabilities, respectively related to shares that were subject to repurchase.

Founder Awards

In August 2016, the Company issued 1,187,738 shares of restricted common stock to founders, of which 1,102,903 shares would vest under a service condition, and 84,835 shares would vest under a performance condition.

The shares were issued under the terms of the respective restricted stock purchase agreements, or the Stock Purchase Agreement, and unvested shares were subject to repurchase by the Company at the original purchase price per share upon the holder’s termination of his relationship with the Company.

The restricted shares were not considered outstanding for accounting purposes until they vested and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature.

One-fourth of the 1,102,903 shares of restricted common stock were vested on the first-anniversary date and the remaining 827,177 shares vested on a monthly basis thereafter.

All shares of restricted stock subject to the award were vested as of June 30, 2020.

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 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 December 31, 2022 as the amounts were immaterial.

2020 Employee Stock Purchase Plan

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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 Financial Statements

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

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Accordingly, on January 1, 2023, 2022 and 2021, the ESPP reserve increased by 610,522 , 503,457 , and 436,778 shares, respectively.

As of December 31, 2022, the Company had 1,069,711 shares available for future grant under the ESPP.

Stock-based compensation expense related to the ESPP was $ 880,000 and $ 442,000 for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2021, 82,703 shares of stock have been issued under the ESPP.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

No provision for income taxes was recorded for the years ended December 31, 2022, 2021 and 2020.

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Permanent differences

1,224 1,243 616

Ducentis IPR&D 6,223 — —

162(m) limitation 1,410 757 —

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Provision for income tax

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

Significant components of the Company’s deferred income taxes were as follows (in thousands):

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Research and development tax credits 9,302 5,832

Section 174 R&E capitalization 34,646 —

Accruals and reserves 3,693 2,318

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The valuation allowance increased by approximately $ 72.4 million and $ 44.7 million during the years ended December 31, 2022 and 2021, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The Company has NOL carryforwards for federal, California and other state income tax purposes of approximately $ 471.2 million, $ 388.9 million and $ 79.8 million, respectively, as of December 31, 2022.

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Of the $ 468.7 million in state net operating loss carryforwards $ 14.6 million can be carried forward indefinitely and the remaining start to expire in 2030.

On March 27, 2020, the CARES Act was signed into law in response to the economic challenges facing U.S.

Under the CARES Act, the Internal Revenue Code was amended to allow for federal NOL carrybacks for five years to offset previous years income, or can be carryforward indefinitely to offset 100% of taxable income for the tax year 2020 and 80% of taxable income for tax years 2021 and thereafter.

As of the date the financial statements were available to be issued, the state NOL carryforwards, if not utilized, will expire beginning in 2030.

As of December 31, 2022, the Company also had federal and California research and development tax credit carryforwards of $ 16.8 million and $ 3.6 million, respectively.

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Federal and California tax laws impose significant restrictions on the utilization of NOL carryforwards in the event of a change in ownership of the Company, as defined by Internal Revenue Code Section 382 and 383.

The Company has not completed a formal study to determine the limitations on their tax attributes due to change in ownership and may have limitations on the utilization of NOL carryforwards, credit carryforwards, or other tax attributes due to ownership changes.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Financial Statements

The Company believes it has had ownership changes in the past, and may have additional ownership changes in the future.

These ownership changes could limit its ability to use all of its NOL carryforwards, credit carryforwards, or other tax attributes.

The Inflation Reduction Act 2022 (IRA) which incorporates a Corporate Alternative Minimum Tax (CAMT) was signed on August 16, 2022.

The changes will be effective for the tax years beginning after December 31, 2022.

The new tax will require companies to compute two separate calculations for federal income tax purposes and pay the greater of the new minimum tax or their regular tax liability.

The IRA is not expected to have a material impact for the Company.

Uncertain Tax Benefits

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The Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months.

Income tax returns are filed in the United States and California.

The Company is not currently under audit by the Internal Revenue Service or similar state or local authorities.

The years 2016 and forward remain open to examination by the domestic taxing jurisdictions to which the Company is subject.

Due to NOL carryforwards, all years effectively remain open to income tax examination by the domestic taxing jurisdictions in which the Company files tax returns.

Included in unrecognized tax benefits of $ 42.5 million at December 31, 2022 was $ 35.3 million of tax benefits that, if recognized, would reduce our annual effective tax rate, subject to valuation allowance.

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Our tax years for 2016 and forward are subject to examination by the U.S.

tax authorities and our tax years for 2016 and forward are subject to examination by the California tax authorities due to carryforward of unutilized NOLs and research and development credits.

tax authorities and our tax years for 2016 and forward are subject to examination by the California tax authorities.

Due to net operating loss carryforwards and research and development credits all years effectively remain open.

It is our practice to recognize interest and/or penalties related to income tax matters in income tax expense.

For the years ended December 31, 2022, 2021 and 2020, the Company has no t recognized any interest or penalties related to income taxes.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Net Loss Per Share

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2022 2021 2020

Convertible preferred stock on an as-converted basis — — 24,385,388

Stock options to purchase common stock 7,476,223 5,757,957 3,655,945

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ESPP shares subject to future issuance 17,046 12,219 3,733

Restricted stock subject to future vesting — — 137,863

Total 9,084,651 6,195,518 4,161,993

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Welgus Director February 28, 2023

/s/ Neha Krishnamohan Director February 28, 2023

Neha Krishnamohan

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

What changed 10-K

Item 9A. Controls and Procedures