Arcutis Biotherapeutics, Inc. 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such required information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based our assessment on the criteria set forth in "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2022. 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. 109 Table of Contents Index to Financial Statements Changes in Internal Control over Financial Reporting There was no change in our internal controls over financial reporting during the year ended December 31, 2022 covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Effectiveness of Controls and Procedures Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate. 110 Table of Contents Index to Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Arcutis Biotherapeutics, Inc. Opinion on Internal Control Over Financial Reporting We have audited Arcutis Biotherapeutics, Inc.’s internal control over financial reporting as of December 31, 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, 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 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 The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Los Angeles, California February 28, 2023 111 Table of Contents Index to Financial Statements Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. Part III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates. 112 Table of Contents Index to Financial Statements Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Financial Statement Schedules. The following financial statements are included herein: Page Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations and Comprehensive Loss F-3 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 113 Table of Contents Index to Financial Statements (b) Exhibits. Exhibit Number Description of Document Incorporated by Reference Form Date Number Filed/Furnished Herewith 3.1 Restated Certificate of Incorporation. 10-Q 5/12/20 3.1 3.2 Restated Bylaws. 10-Q 5/12/20 3.2 4.1 Form of Common Stock Certificate. S-1/A 1/21/20 4.1 4.2† Amended and Restated Investors’ Rights Agreement, dated October 8, 2019, by and among the Registrant and certain of its stockholders. S-1/A 1/21/20 4.2 4.3 Description of Arcutis Biotherapeutics’ Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 10-K 3/19/20 4.3 10.1# Form of Indemnity Agreement. S-1 1/6/20 10.1 10.2# 2017 Stock Incentive Plan and forms of award agreements. S-1 1/6/20 10.2 10.3# 2020 Stock Incentive Plan and forms of award agreements. S-1/A 1/21/20 10.3 10.4# 2020 Employee Stock Purchase Plan and forms of award agreements. S-1/A 1/21/20 10.4 10.5# 2022 Employment Inducement Incentive Plan and forms of award agreements. 10-K 2/22/22 10.5 10.6# Offer Letter, dated January 9, 2020, by and between the Registrant and Todd Franklin Watanabe. S-1/A 1/21/20 10.5 10.7# Offer Letter, dated January 9, 2020, by and between the Registrant and David W. Osborne. S-1/A 1/21/20 10.6 10.8# Offer Letter, dated January 9, 2020, by and between the Registrant and Howard G. Welgus, M.D. S-1/A 1/21/20 10.7 10.9# Offer Letter, dated January 9, 2020, by and between the Registrant and John W. Smither. S-1/A 1/21/20 10.8 10.10# Offer Letter, dated January 9, 2020, by and between the Registrant and Kenneth A. Lock. S-1/A 1/21/20 10.9 10.11# Offer Letter, dated January 9, 2020, by and between the Registrant and Patricia A. Turney. S-1/A 1/21/20 10.10 10.12# Consulting Agreement, dated August 16, 2016, by and between Bhaskar Chaudhuri and the Registrant. S-1 1/6/20 10.11 10.13†^ License Agreement, dated July 23, 2018, by and between AstraZeneca AB and the Registrant. S-1 1/6/20 10.12 10.14†^ Exclusive Option and License Agreement, dated January 4, 2018, by and between Jiangsu Hengrui Medicine Co., Ltd. and the Registrant. S-1 1/6/20 10.13 10.15†^ Collaboration Agreement, dated June 28, 2019, by and between Hawkeye Therapeutics, Inc. and the Registrant. S-1 1/6/20 10.14 10.16# Transition and Amendment Agreement, dated December 13, 2019 by and between Bhaskar Chaudhuri and the Registrant. S-1 1/6/20 10.15 10.17 Option Notice and Amendment No. 2 to Exclusive Option and License Agreement, dated December 5, 2019, by and between Jiangsu Hengrui Medicine Co., Ltd. and the Registrant. S-1 1/6/20 10.16 10.18# Severance & Change in Control Agreement, by and between the Registrant and Todd Franklin Watanabe. S-1/A 1/21/20 10.17 10.19# Severance & Change in Control Agreement, by and between the Registrant and David W. Osborne. S-1/A 1/21/20 10.18 10.20# Severance & Change in Control Agreement, by and between the Registrant and Howard G. Welgus, M.D. S-1/A 1/21/20 10.19 10.21# Severance & Change in Control Agreement, by and between the Registrant and John W. Smither. S-1/A 1/21/20 10.20 114 Table of Contents Index to Financial Statements 10.22 Severance & Change in Control Agreement, by and between the Registrant and Kenneth A. Lock. S-1/A 1/21/20 10.21 10.23 Severance & Change in Control Agreement, by and between the Registrant and Patricia A. Turney. S-1/A 1/21/20 10.22 10.24 Offer Letter, dated December 18, 2020, by and between the Registrant and Matthew R. Moore. 10-K 2/16/21 10.23 10.25 Severance & Change in Control Agreement, by and between the Registrant and Matthew R. Moore. 10-K 2/16/21 10.24 10.26†^ Supply Agreement, dated November 24, 2020, by and between Registrant and Interquim, S.A. 10-K 2/16/21 10.25 10.27†^ Exclusive Distribution Agreement, dated February 8, 2021, by and between the Registrant and Cardinal Health 105, Inc. 10-Q 5/6/21 10.1 10.28†^ 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. Burrows. 10-Q 5/6/21 10.2 10.30 Sales Agreement, dated May 6, 2021, by and between the Registrant and Cowen and Company, LLC. 10-Q 5/6/21 10.3 10.31† Supply and Manufacturing Agreement, dated September 15, 2021, between DPT Laboratories, Ltd. and the Registrant. 10-Q 11/4/21 10.1 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-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. * 24.1 Power of Attorney (included in the signature page to this Annual Report on Form 10-K). * 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** 115 Table of Contents 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. * 101.SCH Inline XBRL Taxonomy Extension Schema Document. * 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. * 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. * 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. * 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. * 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * ______________ * Filed herewith. ** Furnished herewith. † Registrant has omitted portions of the exhibit as permitted under Item 601(b)(10) of Regulation S-K. ^ Registrant has omitted schedules and exhibits pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request. # Indicates management contract or compensatory plan. 116 Table of Contents Index to Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Arcutis Biotherapeutics, Inc. Opinion on the 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. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023, expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion . Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F-1 Table of Contents Index to Financial Statements Accrued Clinical Trial Costs Description of the Matter As of December 31, 2022, the Company recorded $7.4 million for accrued clinical trial costs. 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. Auditing the Company’s accounting for accrued clinical trial costs was challenging because calculating the liability for clinical trial activity includes determining the progress or stage of completion of the activities within each clinical trial based on internal and external information, and involves a high volume of data. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s process for estimating accrued clinical trial costs, including controls over management’s measurement of clinical trial progress and the related estimates of costs incurred. We also tested controls over management’s review of the completeness and accuracy of data used in determining the accruals. To test the adequacy of the Company’s accrued clinical trial costs, we performed audit procedures that included, among others, inspecting correspondence between internal clinical trial study managers and external clinical trial service providers for selected clinical trials and performing corroborative inquiries of accounting personnel and internal clinical project managers to validate the progress of clinical trial activities. To assess the appropriate measurement of accrued clinical trial costs, we reviewed significant agreements, and associated amendments and change orders, obtained external confirmation of key study dates and patient enrollment status directly with the CROs, selected a sample of transactions to inspect invoices, and vouched payments to bank statements. Additionally, we reviewed payments made subsequent to year-end to evaluate the completeness of the accrued clinical trial costs. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Los Angeles, California February 28, 2023 F-2 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Balance Sheets (In thousands, except share and par value) December 31, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 53,641 $ 96,449 Restricted cash 1,234 1,542 Marketable securities 355,948 290,610 Trade receivables, net 8,458 — Inventory 7,514 — Prepaid expenses and other current assets 10,611 14,172 Total current assets 437,406 402,773 Property and equipment, net 1,881 2,261 Intangible assets, net 7,188 — Operating lease right-of-use asset 2,721 3,040 Other assets 78 78 Total assets $ 449,274 $ 408,152 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 8,827 $ 7,353 Accrued liabilities 28,323 25,540 Operating lease liability 657 433 Total current liabilities 37,807 33,326 Operating lease liability, noncurrent 4,117 4,774 Long-term debt, net 197,769 72,350 Other long-term liabilities — 25 Total liabilities 239,693 110,475 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized at December 31, 2022 and December 31, 2021; no shares issued and outstanding at December 31, 2022 and December 31, 2021; — — Common stock, $ 0.0001 par value; 300,000,000 and 300,000,000 shares authorized at December 31, 2022 and December 31, 2021, respectively; 61,052,250 and 50,345,755 shares issued at December 31, 2022 and December 31, 2021, respectively; 61,036,787 and 50,255,614 shares outstanding at December 31, 2022 and December 31, 2021, respectively 6 5 Additional paid-in capital 930,425 706,233 Accumulated other comprehensive loss ( 1,086 ) ( 255 ) Accumulated deficit ( 719,764 ) ( 408,306 ) Total stockholders’ equity 209,581 297,677 Total liabilities and stockholders’ equity $ 449,274 $ 408,152 The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Revenues: Product revenue, net $ 3,686 $ — $ — Total revenues 3,686 — — Operating expenses: Cost of sales 754 — — Research and development 182,435 145,558 115,308 Selling, general and administrative 122,124 60,971 21,337 Total operating expenses 305,313 206,529 136,645 Loss from operations ( 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 Net loss $ ( 311,458 ) $ ( 206,356 ) $ ( 135,678 ) Other comprehensive loss: Unrealized loss on marketable securities ( 831 ) ( 253 ) ( 1 ) Comprehensive loss $ ( 312,289 ) $ ( 206,609 ) $ ( 135,679 ) Per share information: Net loss per share, basic and diluted $ ( 5.66 ) $ ( 4.18 ) $ ( 3.80 ) 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 consolidated financial statements. F-4 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands, except share data) Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity (Deficit) Shares Amount Shares Amount Balance—December 31, 2019 24,385,388 $ 166,491 2,120,853 $ — $ 1,244 $ ( 1 ) $ ( 66,272 ) $ ( 65,029 ) Conversion of preferred stock into common stock upon initial public offering ( 24,385,388 ) ( 166,491 ) 24,385,388 2 166,489 — — 166,491 Issuance of shares of common stock for initial public offering, net of issuance costs of $ 16,040 — — 10,781,250 1 167,240 — — 167,241 Issuance of shares of common stock for public offering, net of issuance costs of $ 6,640 — — 4,000,000 — 93,360 — — 93,360 Issuance of shares of common stock for private placement — — 1,400,000 — 35,000 — — 35,000 Issuance of common stock upon the exercise of stock options — — 140,226 — 430 — — 430 Vesting of founder shares subject to repurchase — — 137,863 — — — — — Lapse of repurchase rights related to common stock issued pursuant to early exercises — — 338,670 1 246 — — 247 Shares issued pursuant to the ESPP — — 34,188 — 617 — — 617 Stock-based compensation expense — — — — 7,943 — — 7,943 Unrealized loss on marketable securities — — — — — ( 1 ) — ( 1 ) Net loss — — — — — — ( 135,678 ) ( 135,678 ) Balance—December 31, 2020 — $ — 43,338,438 $ 4 $ 472,569 $ ( 2 ) $ ( 201,950 ) $ 270,621 Issuance of shares of common stock for public offering, net of issuance costs of $ 603 — — 6,325,000 1 207,489 — — 207,490 Issuance of common stock upon the exercise of stock options — — 257,060 — 1,265 — — 1,265 Issuance of common stock upon the vesting of restricted stock units — — 37,362 — — — — — Lapse of repurchasing rights related to common stock issued pursuant to early exercises — — 249,239 — 176 — — 176 Shares issued pursuant to the ESPP — — 48,515 — 842 — — 842 Stock-based compensation expense — — — — 23,892 — — 23,892 Unrealized loss on marketable securities — — — — — ( 253 ) — ( 253 ) Net loss — — — — — — ( 206,356 ) ( 206,356 ) Balance—December 31, 2021 — $ — 50,255,614 $ 5 $ 706,233 $ ( 255 ) $ ( 408,306 ) $ 297,677 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 Issuance of common stock upon the vesting of restricted stock units — — 118,174 — — — — — Lapse of repurchasing rights related to common stock issued pursuant to early exercises — — 75,293 — 82 — — 82 Shares issued pursuant to the ESPP — — 138,821 — 1,922 — — 1,922 Stock-based compensation expense — — — — 32,682 — — 32,682 Unrealized loss on marketable securities — — — — — ( 831 ) — ( 831 ) Net loss — — — — — — ( 311,458 ) ( 311,458 ) 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 consolidated financial statements. F-5 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2022 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 311,458 ) $ ( 206,356 ) $ ( 135,678 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 622 454 122 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 Loss on disposal of property and equipment — — 42 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 ) Accounts payable 1,565 245 5,674 Accrued liabilities 1,193 10,461 11,877 Operating lease liabilities ( 433 ) 243 ( 6 ) Net cash used in operating activities ( 257,715 ) ( 174,627 ) ( 113,033 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ( 415,389 ) ( 292,508 ) ( 279,103 ) Proceeds from maturities of marketable securities 351,473 217,550 97,600 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 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of stock options 1,016 1,265 526 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 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 (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 Cash, cash equivalents and restricted cash at end of period $ 54,875 $ 97,991 $ 66,624 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: 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 Right-of-use asset obtained in exchange for lease liability $ — $ — $ 3,617 Reduction in right-of-use asset upon reassessment of lease term $ — $ — $ 123 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 1. Organization and Description of Business 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. The Company’s strategy is to focus on validated biological targets and to use our drug development platform and deep dermatology expertise to develop differentiated products that have the potential to address the major shortcomings of existing therapies in its targeted indications. The Company believes this strategy uniquely positions it to rapidly advance its goal of bridging the treatment innovation gap in dermatology, while maximizing its probability of technical success. Initial Public Offering and Follow-On Financings On February 4, 2020, the Company closed an initial public offering (IPO) issuing and selling 10,781,250 shares of common stock at a public offering price of $ 17.00 per share, including 1,406,250 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company from the offering were approximately $ 167.2 million, after deducting underwriting discounts, commissions, and offering related transaction costs . Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into shares of common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding. On October 6, 2020, the Company completed a public offering of 4,000,000 shares of common stock at an offering price of $ 25.00 per share, receiving aggregate net proceeds of approximately $ 93.4 million after deducting the underwriting discounts, commissions, and offering related transaction costs. In addition, the Company concurrently sold 1,400,000 shares of common stock in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, at a price per share equal to the public offering price, receiving net proceeds of $ 35.0 million. On February 5, 2021, the Company completed a public offering of 6,325,000 shares of 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 On May 6, 2021, the Company entered into a sales agreement (Sales Agreement) with Cowen and Company, LLC (Cowen), under which the Company may from time to time issue and sell shares of its common stock through ATM offerings for an aggregate offering price of up to $ 100.0 million. Cowen will act as the Company's sales agent for the ATM program and is entitled to compensation for its services equal to 3 % of the gross proceeds of any shares of common stock sold under the Sales Agreement. 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. F-7 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Liquidity 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. 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. See Note 8. 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 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. 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. Coronavirus Outbreak In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 (COVID-19) outbreak. The Company is monitoring the impact COVID-19 may have on the clinical development of its product candidates, including potential delays or modifications to its ongoing and planned trials, as well as its 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, the Company has updated its expected timeline for providing topline data for the INTEGUMENT-PED trial, in atopic dermatitis subjects between two and five years of age, to 2023. The Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its financial condition and operations, including ongoing and planned clinical trials and commercial activities. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). 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 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 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. Actual results could differ from those estimates. F-8 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Segments To date, the Company has viewed its financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of money market funds, commercial paper, U.S. Treasury securities, and short-term corporate debt securities. Restricted Cash As of December 31, 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. See Note 7. Marketable Securities Marketable securities consist of investment grade short to intermediate-term fixed income investments that have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in fixed income securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase, including those that have maturity dates beyond one year from the balance sheet date, are classified as current assets on the 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). Realized gains and losses as well as credit losses, if any, on marketable securities are included in other income, net. The Company evaluated the underlying credit quality and credit ratings of the issuers during the period. To date, no such credit losses have occurred or have been recorded. The cost of investments sold is based on the specific-identification method. Unrealized gains and losses on marketable securities are reported as a component of accumulated other comprehensive income (loss) on the 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. Inventory 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 F-9 Table of Contents 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. See Note 6. 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: Amounts 2023 750 2024 750 2025 750 2026 750 2027 750 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 Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash to the extent recorded on the 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. Fair Value Measurement The Company’s financial instruments, in addition to those presented in Note 3, include cash equivalents, accounts payable, accrued liabilities, and long-term debt. The carrying amount of cash equivalents, accounts payable, and accrued liabilities approximate their fair values due to their short maturities. As the long-term debt is subject to variable interest rates that are based on market rates which regularly reset, the Company believes that the carrying value of the long-term debt approximates its fair value. 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 F-10 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. 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. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets which range from two to five years . Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms. Maintenance and repairs are expensed as incurred. The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairments recognized during the years ended December 31, 2022, 2021 or 2020. Leases The Company determines if an arrangement is or contains a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The classification of the Company’s leases as operating or finance leases, along with the initial measurement and recognition of the associated ROU assets and lease liabilities, is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate, based on the information available at commencement date, to determine the present value of lease payments when its leases do not provide an implicit rate. The Company uses the implicit rate when readily determinable. The ROU asset is based on the measurement of the lease liability, includes any lease payments made prior to or on lease commencement and is adjusted for lease incentives and initial direct costs incurred, as applicable. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company considers a lease term to be the non-cancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. The Company’s lease agreements includes lease and non-lease components and the Company has elected to not separate such components for all classes of assets. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to leases with terms of 12 months or less (short-term leases) for all classes of assets. F-11 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Nonclinical and Clinical Accruals and Costs The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of nonclinical studies, clinical trials, and contract manufacturing activities. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. For the years ended December 31, 2022, 2021 and 2020, 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 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. The Company recorded the issuance of convertible preferred stock at the issuance price less related issuance costs. The Company did not adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty as to whether or when a deemed liquidation event may have occurred. In connection with the IPO in February 2020, the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock. Revenues 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- F-12 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 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. 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. Chargeback : 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 Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, license fees, stock-based compensation expense, materials, supplies, and the cost of services provided by outside contractors. All costs associated with research and development are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods are received or services are rendered. Such payments are evaluated for current or long-term classification based on when they will be realized. F-13 Table of Contents 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. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date, none of the Company’s license agreements have been considered an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval that do not meet the definition of a derivative, are immediately recognized as research and development expense when paid or become payable, provided there is no alternative future use of the rights in other research and development projects. Stock-Based Compensation The Company accounts for share-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for such awards is the date of grant and the expense is recognized on a straight-line basis, over the expected vesting period. For share-based awards that vest subject to a performance condition, the Company will recognize compensation cost for awards if and when the Company concludes that it is probable that the awards with a performance condition will be achieved on an accelerated attribution method. The Company accounts for forfeitures as they occur. Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance. The Company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based on the merits of the position. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties incurred in relation to the unrecognized tax benefits. Variable Interest Entities The Company reviews agreements it enters into with third-party entities, pursuant to which the Company may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (VIE). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s 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. F-14 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Net Loss Per Share Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive. Shares of common stock subject to repurchase are excluded from the weighted-average shares. Recently Adopted Accounting Pronouncements There have been no new accounting pronouncements issued or effective that are expected to have a material impact on the Company's consolidated financial statements. 3. Fair Value Measurements The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 53,641 $ — $ — $ 53,641 Commercial paper — 177,099 — 177,099 Corporate debt securities — 13,821 — 13,821 U.S. Treasury securities 165,028 — — 165,028 Total assets $ 218,669 $ 190,920 $ — $ 409,589 December 31, 2021 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 95,145 $ — $ — $ 95,145 Commercial paper — 119,413 — 119,413 Corporate debt securities — 114,324 — 114,324 U.S. Treasury securities 58,177 — — 58,177 Total assets $ 153,322 $ 233,737 $ — $ 387,059 ______________ (1) This balance includes cash requirements settled on a nightly basis. F-15 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Money market funds and U.S. Treasury securities are valued based on quoted market prices in active markets, with no valuation adjustment. Commercial paper and corporate debt securities are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. The following table summarizes the estimated value of the Company’s cash, cash equivalents and marketable securities, and the gross unrealized holding gains and losses (in thousands): December 31, 2022 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) $ 53,641 $ — $ — $ 53,641 Total cash and cash equivalents $ 53,641 $ — $ — $ 53,641 Marketable securities: Commercial paper $ 177,099 — — $ 177,099 Corporate debt securities 13,890 — ( 69 ) 13,821 U.S. Treasury securities 166,045 7 ( 1,024 ) 165,028 Total marketable securities $ 357,034 $ 7 $ ( 1,093 ) $ 355,948 ______________ (1) This balance includes cash requirements settled on a nightly basis. December 31, 2021 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) $ 95,145 $ — $ — $ 95,145 Corporate debt securities 1,304 — — 1,304 Total cash and cash equivalents $ 96,449 $ — $ — $ 96,449 Marketable securities: Commercial paper $ 119,413 $ — $ — $ 119,413 Corporate debt securities 113,145 — ( 125 ) 113,020 U.S. Treasury securities 58,307 — ( 130 ) 58,177 Total marketable securities $ 290,865 $ — $ ( 255 ) $ 290,610 ______________ (1) This balance includes cash requirements settled on a nightly basis. Realized gains or losses on investments for the years ended December 31, 2022 and 2021 were no t material. As of December 31, 2022 and 2021, unrealized losses on marketable securities were no t material, and accordingly, no allowance for credit losses were recorded. 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. F-16 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 4. Balance Sheet Components Inventories The components of inventory are summarized as follows (in thousands): December 31, 2022 2021 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): December 31, 2022 2021 Prepaid co-pay assistance program $ 3,226 $ — Prepaid insurance 956 518 Prepaid clinical trial costs 172 5,629 Other prepaid expenses and current assets 6,257 8,025 Total prepaid expenses and other current assets $ 10,611 $ 14,172 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2022 2021 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 Total accrued liabilities $ 28,323 $ 25,540 F-17 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 5. Property and Equipment, net Property and equipment, net consists of the following (in thousands): December 31, 2022 2021 Computer hardware $ 983 $ 775 Furniture and fixtures 379 346 Software 104 104 Leasehold improvements 1,568 1,568 Property and equipment, gross 3,034 2,793 Less accumulated depreciation ( 1,153 ) ( 532 ) Property and equipment, net $ 1,881 $ 2,261 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 ). 6. License Agreements & Acquisition AstraZeneca License Agreement In July 2018, the Company entered into an exclusive license agreement, or the AstraZeneca License Agreement, with AstraZeneca AB (AstraZeneca), granting the Company a worldwide exclusive license, with the right to sublicense through multiple tiers, under certain AstraZeneca-controlled patent rights, know-how and regulatory documentation, to research, develop, manufacture, commercialize and otherwise exploit products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, the AZ-Licensed Products, for all diagnostic, prophylactic and therapeutic uses for human dermatological indications, or the Dermatology Field. Under this agreement, the Company has sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at its expense, and it shall use commercially reasonable efforts to develop, obtain and maintain regulatory approvals for, and commercialize the AZ-Licensed Products in the Dermatology Field in each of the United States, Italy, Spain, Germany, the United Kingdom, France, China, and Japan. The Company paid AstraZeneca an upfront non-refundable cash payment of $ 1.0 million and issued 484,388 shares of Series B convertible preferred stock, valued at $ 3.0 million on the date of the AstraZeneca License Agreement, which were both recorded in research and development expense. The Company subsequently paid AstraZeneca the first milestone cash payment of $ 2.0 million upon the completion of a Phase 2b study of topical roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product, which was recorded in research and development expense. 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. As a result of the commercialization of ZORYVE in August 2022, the Company began accruing royalties payable to F-18 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. 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 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. In December 2019, the Company exercised its exclusive option under the agreement, for which it made a $ 1.5 million cash payment, which was recorded in research and development expense, and also contemporaneously amended the agreement to expand the territory to additionally include Canada. In addition, the Company has agreed to make cash payments of up to an aggregate of $ 20.5 million upon achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $ 200.0 million in sales-based milestones based on certain aggregate annual net sales volumes with respect to a licensed product. With respect to any products the Company commercializes under the Hengrui License Agreement, it will pay tiered royalties to Hengrui on net sales of each licensed product by the Company, or its affiliates, or its sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions. The Company is obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis. Additionally, the Company is obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income it receives from sublicensees of its rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance. 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 (lolyx Therapeutics) Collaboration Agreement In June 2019, the Company entered into a collaboration agreement, or Hawkeye Agreement, with Hawkeye Therapeutics, Inc. (Hawkeye), a related party with common ownership, for the development of one or more new applications of roflumilast. The Hawkeye Agreement grants Hawkeye an exclusive license to certain intellectual property developed under the agreement as it relates to the applications. Contemporaneously with the execution of the Hawkeye Agreement, the Company entered into a stock purchase agreement, purchasing 995,000 shares of Hawkeye’s common stock at $ 0.0001 per share, representing 19.9 % of the outstanding common stock of Hawkeye at the time of the purchase. In the event that Hawkeye issues shares of Series A convertible preferred stock with proceeds over $ 5.0 million, Hawkeye is required to issue to the Company a number of fully-paid fully-vested shares of common stock determined by dividing (i) $ 2,000,000 by (ii) an amount equal to the cash price per share for Series A convertible preferred stock. Other than the potential issuance of this common stock, there are no upfront payments, milestones, or royalties pursuant to the Hawkeye Agreement. The Company determined that Hawkeye is a VIE for which consolidation is not required as it is not the primary beneficiary. F-19 Table of Contents 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. 7. Commitments and Contingencies Operating Lease The Company leases a facility in Westlake Village, California under an operating lease that commenced in February 2019 and was amended in April 2020 in order to relocate to a new expanded space comprising 22,643 square feet. The Company recognized the ROU asset and lease liability for the new space on May 1, 2020. The lease payment term for the new space began on December 30, 2020. The lease payments terminate 91 months thereafter, with a renewal option for a term of five years . The Company will have a one-time option to cancel the lease after month 67 . The renewal and one-time cancellation options have not been considered in the determination of the ROU asset or lease liability as the Company did not consider it reasonably certain it would exercise these options. The lease is subject to fixed rate escalation increases with an initial base rent of $ 76,000 per month, and includes rent free periods aggregating approximately one year . As a result, the Company recognizes rent expense on a straight-line basis for the full amount of the commitment including the minimum rent increases over the life of the lease and the free rent period. The amended lease agreement provided for a leasehold improvement allowance up to $ 1.25 million, which the Company fully utilized by incurring related costs. This amount, along with $ 320,000 of additional costs incurred for leasehold improvements beyond the allowance, were capitalized and included in property and equipment as of December 31, 2020. The amended lease agreement also required the Company to have an available letter of credit of $ 1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met. Accordingly, in November 2020, the Company entered into a letter of credit for $ 1.5 million, F-20 Table of Contents 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 minimum annual rental payments of the Company’s operating lease liability as of December 31, 2022 are as follows (in thousands): Amounts 2023 $ 965 2024 994 2025 1,024 2026 1,054 2027 1,087 2028 653 Total minimum lease payments $ 5,777 Less: Amounts representing interest ( 1,003 ) Present value of future minimum lease payments $ 4,774 Current portion operating lease liability 657 Operating lease liability, noncurrent 4,117 Total operating lease liability $ 4,774 Straight-line rent expense recognized for operating leases was $ 716,000 , $ 686,000 , and $ 602,000 for the years ended December 31, 2022, 2021, and 2020, respectively. There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the years ended December 31, 2022, 2021, and 2020. The following information represents supplemental disclosure for the consolidated statements of cash flows related to the Company’s operating lease (in thousands): December 31, 2022 2021 2020 Cash flows from operating activities Cash paid for amounts included in the measurement of lease liabilities $ 781 $ 114 $ 192 The following summarizes additional information related to the operating lease: December 31, 2022 Weighted-average remaining lease term (in years) 5.6 Weighted-average discount rate 7.0 % Manufacturing Agreements 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. F-21 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Indemnification In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by the provisions of the Company's Bylaws and the Delaware General Corporation Law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes any potential loss exposure under these indemnification agreements in excess of applicable insurance coverage is minimal. 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. See Note 6. 8. Long-term debt On December 22, 2021, the Company entered into a Loan Agreement with SLR and the lenders party thereto. The lenders agreed to extend term loans to the Company in an aggregate principal amount of up to $ 225.0 million, comprised of (i) a tranche A term loan of $ 75.0 million, (ii) a tranche B-1 term loan of $ 50.0 million, (iii) a tranche B-2 term loan of up to $ 75.0 million, available in minimum increments of $ 15.0 million, and (iv) a tranche C term loan of up to $ 25.0 million (Term Loans). As security for the obligations under the Loan Agreement, the Company granted SLR, for the benefit of the lenders, a continuing security interest in substantially all of the Company's assets, including its intellectual property, subject to certain exceptions. The tranche A term loan under the Loan Agreement was funded on December 22, 2021 in the amount of $ 75.0 million. 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. The tranche C term loan will remain available for funding until September 30, 2024. Principal amounts outstanding under the Term Loans will accrue interest at a floating rate equal to the applicable rate in effect from time to time, as determined by SLR on the third business day prior to the funding date of the applicable Term Loan and on the first business day of the month prior to each payment date of each Term Loan. The applicable rate is a per annum interest rate equal to 7.45 % plus the greater of (a) 0.10 % and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. (or on any successor or substitute published rate) for a term of one month, subject to a replacement with an alternate benchmark rate and spread in certain circumstances. On December 31, 2022, the rate was 11.62 %. The maturity date for each term loan is January 1, 2027. Commencing on February 1, 2022, interest payments are payable monthly following the funding of any Term Loan. Any principal amounts outstanding under the Term Loans, if not repaid sooner, are due and payable on January 1, 2027, or the Maturity Date. The Company may voluntarily prepay principal amounts outstanding under the Term Loans in minimum increments of $ 5.0 million, subject to a prepayment premium of (i) 3.0 % of the principal amount of such Term Loan so prepaid prior to December 22, 2022, (ii) 2.0 % of the principal amount of such Term 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 F-22 Table of Contents 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. The Company has also agreed to a financial covenant whereby, beginning with the month ending December 31, 2023, the Company must generate net product revenue in excess of specified amounts for applicable measuring periods; provided, however, that such financial covenant shall not apply if the Company’s average market capitalization over the trailing five day period prior to the last day of any measurement month is equal to or in excess of $ 400.0 million. The Company was in compliance with all covenants under the Loan Agreement as of December 31, 2022. In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans. Under the Loan Agreement, an event of default will occur if, among other things, the Company fails to make payments under the Loan Agreement, the Company breaches any of our covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches, the lenders determine that a material adverse change has occurred, or the Company or the Company's assets become subject to certain legal proceedings, such as bankruptcy proceedings. Upon the occurrence and for the duration of an event of default, an additional default interest rate, or the Default Rate, equal to 4.0 % per annum will apply to all obligations owed under the Loan Agreement. The prepayment upon default and other potential additional interest provisions under the Loan Agreement were determined to be a compound embedded derivative instrument to be bifurcated from the loan and accounted for as a separate liability for accounting purposes under the guidance in ASC 815, Derivatives and Hedging. At the inception of the Loan Agreement and through December 31, 2022, the fair value of the embedded derivative was determined to be immaterial and will be remeasured at fair value each reporting period with any future changes in fair value reported in earnings. I n connection with the Loan Agreement, the Company paid a closing fee of $ 1.0 million on December 22, 2021, and is further obligated to pay (i) a final fee equal to 6.95 % of the aggregate original principal amount of the Term Loans funded upon the earliest to occur of the Maturity Date, the acceleration of any Term Loan and the prepayment, refinancing, substitution, or replacement of any Term Loan and (ii) a certain amount of lenders’ expenses incurred in connection with the execution of the Loan Agreement. Additionally, in connection with the Loan Agreement, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount 3.0 % of each Term Loan funded upon (i) any change of control transaction or (ii) a revenue milestone, calculated on a trailing six month basis. Notwithstanding the prepayment or termination of the Term Loan, the exit fee will expire 10 years from the date of the Loan Agreement. The debt issuance costs have been recorded as a debt discount which are being accreted to interest expense through the maturity date of the term loan. Interest expense is calculated using the effective interest method, and is inclusive of non-cash amortization of debt issuance costs. The final maturity payment of $ 13.9 million is recognized over the life of the term loan through interest expense. At December 31, 2022, the effective interest rate was 13.79 %. 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. F-23 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements The following summarizes additional information related to our long-term debt (in thousands): December 31, 2022 2021 Long-term debt, gross $ 200,000 $ 75,000 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. 9. Convertible Preferred Stock and Stockholders’ Equity Convertible Preferred Stock In connection with the Company's IPO in February 2020, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock. Common Stock The holders of the Company’s common stock have one vote for each share of common stock. Common stockholders are entitled to dividends when, as, and if declared by the board of directors. The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. As of December 31, 2022, no dividends had been declared by the board of directors. The Company reserved the following shares of common stock for issuance as follows: December 31, 2022 2021 Options issued and outstanding 7,476,223 5,757,957 Common stock awards available for grant under employee incentive plans 3,784,386 2,068,004 Restricted stock units outstanding 1,576,529 335,196 Total common stock reserved 12,837,138 8,161,157 Authorized Share Capital On February 4, 2020, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $ 0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $ 0.0001 per share. There were no shares of preferred stock outstanding as of December 31, 2022 and 2021. 10. Stock-Based Compensation In January 2020, the Company’s board of directors approved the 2020 Equity Incentive Plan (2020 Plan), which became effective January 30, 2020 in connection with the IPO. The 2020 Plan serves as the successor incentive award plan to the Company’s 2017 Equity Incentive Plan (2017 Plan) and 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, F-24 Table of Contents 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. The 2020 Plan provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors, and consultants of the Company under terms and provisions established by the board of directors. Under the terms of the 2020 Plan, options may be granted at an exercise price not less than fair market value. The Company generally grants stock-based awards with service conditions. Options granted typically vest over a four-year period but may be granted with different vesting terms. Following the Company’s IPO and in connection with the effectiveness of the Company’s 2020 Plan, the 2017 Plan terminated and no further awards will be granted under that plan. However, all outstanding awards under the 2017 Plan will continue to be governed by their existing terms. In December 2021, the Company’s board of directors approved the 2022 Employment Inducement Incentive Plan (2022 Plan). The 2022 Plan 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 The following summarizes option activity (in thousands, except share amounts): Number of Options Weighted- Average Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value Balance—December 31, 2021 5,757,957 19.06 8.37 34,887 Granted 2,263,200 20.12 Exercised ( 331,890 ) 3.06 Forfeited ( 201,510 ) 24.61 Expired ( 11,534 ) 27.82 Balance—December 31, 2022 7,476,223 19.93 7.98 18,667 Exercisable—12/31/2022 (1) 3,398,758 16.97 7.19 16,185 ______________ (1) Options exercisable includes early exercisable options. The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2022. The intrinsic value of options exercised for the year ended December 31, 2022 was $ 5.6 million. The total grant-date fair value of the options vested during the year ended December 31, 2022 was $ 25.8 million. The weighted-average grant-date fair value of employee options granted during the year ended December 31, 2022 was $ 14.08 . Restricted Stock Unit Activity The following table summarizes information regarding our RSUs: F-25 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Number of Units Weighted-Average Grant Date Fair Value Balance—December 31, 2021 335,196 $ 29.26 Granted 1,433,128 $ 19.24 Vested ( 120,595 ) $ 27.83 Forfeited ( 71,200 ) $ 18.94 Unvested Balance—December 31, 2022 1,576,529 $ 20.73 The grant date fair value of an RSU equals the closing price of our common stock on the grant date. RSUs generally vest equally over four years . There were no RSU grants prior to January 1, 2020. Stock-Based Compensation Expense Stock-based compensation expense included in the statements of operations and comprehensive loss was as follows (in thousands): Year Ended December 31, 2022 2021 2020 Research and development $ 13,034 $ 8,478 $ 3,503 Selling, general and administrative 19,648 15,414 4,440 Total stock-based compensation expense $ 32,682 $ 23,892 $ 7,943 As of December 31, 2022, there was $ 58.3 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 2.6 years. As of December 31, 2022, there was $ 25.6 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 3.1 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 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— 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 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 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. F-26 Table of Contents 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 . The fair value of stock option awards granted was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2022 2021 2020 Expected term (in years) 5.4 – 6.1 5.5 – 6.2 5.5 – 6.8 Expected volatility 77.9 – 82.1 % 80.6 – 85.2 % 78.4 % – 80.8 % Risk-free interest rate 1.4 – 4.2 % 0.6 – 1.3 % 0.3 – 1.4 % Dividend yield — % — % — % Early Exercise of Employee Options The terms of the 2017 and 2020 Plans permit certain option holders to exercise options before their options are vested, subject to certain limitations. Upon early exercise, the awards become subject to a restricted stock agreement. The shares of restricted stock granted upon early exercise of the options are subject to the same vesting provisions in the original stock option awards. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment, at the price paid by the purchaser. While such shares have been issued, they are not considered outstanding for accounting purposes until they vest and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature. 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 The Company adopted the 2020 Employee Stock Purchase Plan, or the ESPP, which became effective on January 30, 2020 in connection with the IPO. The ESPP is designed to allow the Company’s eligible employees to purchase shares of the Company’s common stock, at semi-annual intervals, with their accumulated payroll deductions. Under the ESPP, participants are offered the option to purchase shares of the Company’s common stock at a discount during a series of successive offering periods. The option purchase price will be the lower of 85 % of the closing trading price per share of the Company’s common stock on the first trading date of an offering period in which a participant is enrolled or 85 % of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period. The ESPP is intended to qualify under Section 423 of the U.S. Internal Revenue Service Code of 1986, as amended. The maximum number of the Company’s common stock which will be authorized for sale under the ESPP is equal to the sum of (a) 351,000 shares of common stock and (b) an annual increase on the first day of each year beginning in 2021 and ending in 2030, equal to the lesser of (i) 1 % of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the Company’s board of directors; provided, however, no more than 5,265,000 shares of the Company’s common stock may be issued under the ESPP. Accordingly, on January 1, 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. F-27 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 11. Income Taxes No provision for income taxes was recorded for the years ended December 31, 2022, 2021 and 2020. The Company has incurred NOLs only in the United States since its inception. The Company has not reflected any benefit of such NOL carryforwards in the financial statements. Reconciliation of income tax computed at federal statutory rates to the reported provision for income taxes is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Tax provision at U.S. statutory rate $ ( 65,406 ) $ ( 43,336 ) $ ( 28,493 ) State income taxes, net of federal benefit ( 12,260 ) ( 13,394 ) ( 9,213 ) Research and development tax and other credits ( 2,968 ) ( 2,497 ) ( 2,413 ) Change in valuation allowance 72,149 44,675 30,708 Uncertain tax positions — 12,562 8,801 Permanent differences 1,224 1,243 616 Ducentis IPR&D 6,223 — — 162(m) limitation 1,410 757 — Other ( 372 ) ( 10 ) ( 6 ) Provision for income tax $ — $ — $ — Significant components of the Company’s deferred income taxes were as follows (in thousands): December 31, 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 105,500 $ 76,202 Intangibles 1,469 1,626 Research and development tax credits 9,302 5,832 Section 174 R&E capitalization 34,646 — Accruals and reserves 3,693 2,318 Right-of-use liability 1,221 1,336 Stock-based compensation 7,817 4,126 Gross deferred tax assets $ 163,648 $ 91,440 Deferred tax liabilities: Property and equipment $ ( 225 ) $ ( 296 ) Right-of-use asset ( 696 ) ( 780 ) Gross deferred tax liabilities $ ( 921 ) $ ( 1,076 ) Net deferred tax assets $ 162,727 $ 90,364 Less valuation allowance ( 162,727 ) ( 90,364 ) Total deferred tax assets $ — $ — Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Due to the lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $ 72.4 million and $ 44.7 million during the years ended December 31, 2022 and 2021, respectively. F-28 Table of Contents 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. Of the federal NOLs, $ 3.5 million originated before the 2018 tax year and will expire beginning in 2036. Under the Tax Cuts and Jobs Act of 2017, the remaining $ 467.7 million of NOLs generated after December 31, 2017 will be carried forward indefinitely. 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. 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. The federal research and development tax credit carryforwards will begin to expire in 2037. The California research and development tax credit carryforwards are available indefinitely. Federal and California tax laws impose significant restrictions on the utilization of NOL carryforwards in the event of a change in ownership of the Company, as defined by Internal Revenue Code Section 382 and 383. The Company 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 No liability related to uncertain tax positions is recorded on the financial statements. The following table summarizes the activity related to the unrecognized benefits (in thousands): Year Ended December 31, 2022 2021 2020 Beginning balance $ 38,942 $ 20,274 $ 6,448 Increases (decreases) related to tax positions taken during a prior year 490 ( 6 ) 5 Increases related to tax positions taken during the current year 3,073 18,674 13,821 Ending balance $ 42,505 $ 38,942 $ 20,274 The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. The Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. 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. The Company does not expect that there will be a significant change in the unrecognized tax benefits over the next 12 months. The Company is subject to taxation in the United States and state jurisdictions where applicable. Our tax years for 2016 and forward are subject to examination by the U.S. tax authorities and our tax years for 2016 and forward are subject to examination by the California tax authorities. Due to 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. F-29 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 12. Net Loss Per Share The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect: As of December 31, 2022 2021 2020 Stock options to purchase common stock 7,476,223 5,757,957 3,655,945 Early exercised options subject to future vesting 14,853 90,146 339,385 RSU's subject to future vesting 1,576,529 335,196 162,930 ESPP shares subject to future issuance 17,046 12,219 3,733 Total 9,084,651 6,195,518 4,161,993 F-30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ARCUTIS BIOTHERAPEUTICS, INC. Date: February 28, 2023 By: /s/ Todd Franklin Watanabe Todd Franklin Watanabe President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 28, 2023 By: /s/ Scott L. Burrows Scott L. Burrows Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Todd Franklin Watanabe, Scott L. Burrows and Mas Matsuda, his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or their, his or her substitutes or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Todd Franklin Watanabe President, Chief Executive Officer and Director (Principal Executive Officer) February 28, 2023 Todd Franklin Watanabe /s/ Scott L. Burrows Chief Financial Officer (Principal Accounting and Financial Officer) February 28, 2023 Scott L. Burrows /s/ Patrick J. Heron Director, Chairman February 28, 2023 Patrick J. Heron /s/ Bhaskar Chaudhuri Director February 28, 2023 Bhaskar Chaudhuri, Ph.D. /s/ Terrie Curran Director February 28, 2023 Terrie Curran /s/ Halley E. Gilbert Director February 28, 2023 Halley E. Gilbert /s/ Keith R. Leonard Director February 28, 2023 Keith R. Leonard /s/ Sue-Jean Lin Director February 28, 2023 Sue-Jean Lin /s/ Joseph Turner Director February 28, 2023 Joseph Turner /s/ Howard G. Welgus Director February 28, 2023 Howard G. Welgus, M.D. /s/ Neha Krishnamohan Director February 28, 2023 Neha Krishnamohan