What changed in this filing

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Item 1. Financial Statements

2023-05-09 compared with 2022-11-08 · 181 added, 268 removed, 564 unchanged (44% of the section changed)

3 unchanged sentences

(In thousands, except share and par value)

September 30, December 31,

March 31, December 31,

Current assets:

19 unchanged sentences

Long-term debt, net 198,763 197,769

Other long-term liabilities — 25

Total liabilities 239,726 239,693

2 unchanged sentences

Preferred stock, $ 0.0001 par value;

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

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

10,000,000 shares authorized at March 31, 2023 and December 31, 2022;

no shares issued and outstanding at March 31, 2023 and December 31, 2022;

Common stock, $ 0.0001 par value;

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

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

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

300,000,000 shares authorized at March 31, 2023 and December 31, 2022;

61,369,061 and 61,052,250 shares issued at March 31, 2023 and December 31, 2022, respectively;

61,357,932 and 61,037,403 shares outstanding at March 31, 2023 and December 31, 2022, respectively

Additional paid-in capital 940,004 930,425

7 unchanged sentences

(In thousands, except share and per share data)

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

2022 2021 2022 2021

Three Months Ended March 31,

Product revenue, net $ 2,781 $ —

13 unchanged sentences

Unrealized income (loss) on marketable securities 724 ( 765 )

Foreign currency translation adjustment ( 52 ) —

Total other comprehensive income (loss) $ 672 $ ( 765 )

Comprehensive loss $ ( 79,428 ) $ ( 65,089 )

4 unchanged sentences

ARCUTIS BIOTHERAPEUTICS, INC.

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

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

Preferred Stock Common Stock Additional

Common Stock Additional

Capital Accumulated Other Comprehensive Income (Loss) Accumulated

Deficit Total Stockholders’ Equity (Deficit)

Shares Amount Shares Amount

Deficit Total Stockholders’ Equity

Shares Amount

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

8 unchanged sentences

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

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

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

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

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

Unrealized loss on marketable securities — — — — — ( 78 ) — ( 78 )

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

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

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

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

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

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

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

Net loss — — — — — — ( 56,980 ) ( 56,980 )

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

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

(In thousands, except share data)

Preferred Stock Common Stock Additional

Common Stock Additional

Capital Accumulated Other Comprehensive Income (Loss) Accumulated

Deficit Total Stockholders’ Equity (Deficit)

Shares Amount Shares Amount

Deficit Total Stockholders’ Equity

Shares Amount

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

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

— — 882,353 — 14,366 — — 14,366

Issuance of common stock upon the exercise of stock options 31,497 — 63 — — 63

3 unchanged sentences

Unrealized loss on marketable securities — — — 724 — 724

Foreign currency translation adjustment — — — ( 52 ) — ( 52 )

Net loss — — — — ( 80,100 ) ( 80,100 )

Balance—March 31, 2023 61,357,932 $ 6 $ 940,004 $ ( 414 ) $ ( 799,864 ) $ 139,732

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

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

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

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

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

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

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

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

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

— — 8,625,000 1 161,656 — — 161,657

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

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

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

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

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

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

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

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

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

2 unchanged sentences

(In thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

4 unchanged sentences

Amortization of intangible assets 188 —

Acquired in-process research and development 29,630 —

Net amortization/accretion on marketable securities 89 2,569

Net (accretion) amortization on marketable securities ( 2,161 ) 618

Non-cash interest expense 994 392

12 unchanged sentences

Purchases of property and equipment ( 82 ) ( 124 )

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

Milestone payment for intangible ( 7,500 ) —

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

Net cash provided by investing activities 107,751 15,297

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock upon exercise of stock options 100 261

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

Proceeds from issuance of common stock, net of issuance costs — 14,455

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

Proceeds from long-term debt 125,000 —

Payment of debt issuance costs ( 2,187 ) —

Net cash provided by financing activities 100 14,716

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

Effect of exchange rate changes on cash ( 52 ) —

Net increase (decrease) in cash, cash equivalents, and restricted cash 27,455 ( 26,962 )

Cash, cash equivalents, and restricted cash at beginning of period 54,875 97,991

2 unchanged sentences

Interest expense paid in cash $ 5,999 $ 1,425

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

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

4 unchanged sentences

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.

Food and Drug Administration (FDA) approval of its first product, ZORYVE ® (roflumilast) cream 0.3%, on July 29, 2022, for the treatment of 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.

3 unchanged sentences

Initial Public Offering and Follow-On Financings

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

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 Offerings

On May 6, 2021, the Company entered into a sales agreement (Sales Agreement) with Cowen and Company, LLC (Cowen), under which the Company may from time to time issue and sell shares of its common stock through at-the-market (ATM) offerings for an aggregate offering price of up to $ 100.0 million.

On February 4, 2020, the Company closed an initial public offering (IPO) issuing and selling shares of its common stock receiving aggregate net proceeds of approximately $ 167.2 million.

The company completed subsequent public sales of its common stock in October 2020, February 2021 and August 2022, receiving aggregate net proceeds of $ 93.4 million, $ 207.5 million, and $ 161.6 million, respectively.

In October 2020, the Company also sold shares of common stock in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, receiving net proceeds of $ 35.0 million.

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

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

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

After this draw down, the Company has $ 200.0 million outstanding under the Loan Agreement as of September 30, 2022, with an additional $ 25.0 million in funding that may become available subject to the satisfaction of specified conditions.

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

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

Management expects operating losses to continue for the foreseeable future.

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 799.9 million and $ 719.8 million as of March 31, 2023 and December 31, 2022, respectively.

Management expects to continue to incur operating losses.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 333.3 million and $ 410.8 million as of March 31, 2023 and December 31, 2022, respectively.

The Company has $ 200.0 million outstanding under the Loan Agreement as of March 31, 2023, with an additional $ 25.0 million in funding that may become available subject to the satisfaction of specified conditions.

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 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.

If the Company's available cash and marketable securities, 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.

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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 planned commercial activities.

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Summary of Significant Accounting Policies

4 unchanged sentences

Use of Estimates

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

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

The preparation of condensed 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, fair value of common stock and convertible preferred stock (prior to the IPO completed in January 2020), stock-based compensation expense, and income taxes.

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

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

Actual results could differ from those estimates.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

To date, the Company has viewed its financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources.

1 unchanged sentence

Unaudited Interim Condensed Consolidated Financial Statements

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

The interim condensed consolidated balance sheet as of March 31, 2023, the interim condensed consolidated statements of operations and comprehensive loss, and the condensed consolidated changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2023 and 2022 are unaudited.

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

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

The condensed consolidated results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any other future annual or interim period.

The condensed consolidated results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023 or for any other future annual or interim period.

The condensed consolidated balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date.

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Restricted Cash

As of September 30, 2022 and December 31, 2021, the Company held $ 1.2 million and $ 1.5 million, respectively, of restricted cash as collateral for a letter of credit related to our amended office space lease.

As of March 31, 2023 and December 31, 2022, the Company held $ 0.9 million and $ 1.2 million, respectively, of restricted cash as collateral for a letter of credit related to our amended office space lease.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Marketable Securities

2 unchanged sentences

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

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

Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss) on the condensed consolidated balance sheets.

Realized gains and losses as well as credit losses, if any, on marketable securities are included in other income, net.

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

The Company evaluated the underlying credit quality and credit ratings of the issuers during the period.

1 unchanged sentence

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Trade Receivables, net

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

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

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.

1 unchanged sentence

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

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

The reserve amount for estimated losses was not material as of March 31, 2023 and December 31, 2022.

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

2 unchanged sentences

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.

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

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

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

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

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

Products that may be used in clinical development programs are excluded from inventory and their costs are charged to research and development expense in the condensed consolidated statement of operations as incurred, as long as they do not have an alternative use.

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

As of March 31, 2023 and December 31, 2022, the Company had inventory, mostly at the raw materials stage, with a value of approximately $ 12.7 million and $ 14.1 million, respectively, that was previously expensed, which is expected to be sold 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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Intangible Assets, net

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

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

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

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

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

2022 (October through December) $ 188

Amortization expense for the three months ended March 31, 2023 was immaterial.

Estimated future amortization expense for the intangible assets subsequent to March 31, 2023 is as follows (in thousands):

2023 (April through December) $ 562

Thereafter 3,438

Total amortization $ 7,000

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

To do so, the Company compares the carrying value of the intangible asset to the undiscounted net cash flows over its remaining useful life, and if not recoverable, will estimate the fair value of the asset.

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.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, and accounts receivable.

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

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

The Company is exposed to credit risk in the event of a default by either the financial institutions holding its cash or by its customers owing trade receivables to the extent recorded on the condensed consolidated balance sheets.

To manage accounts receivable credit risk, the Company continuously evaluates the creditworthiness of its customers and the need for an allowance for potential credit losses.

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.

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

The carrying amount of cash equivalents, accounts receivable, 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.

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The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows:

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

There were no impairments recognized during the three months ended March 31, 2023 and 2022.

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

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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.

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.

Accrued and Prepaid Nonclinical and Clinical Costs

The Company records accrued liabilities for estimated costs and prepaid costs for 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.

The Company makes significant judgments and estimates in determining the accrued liabilities and prepaid costs balance in each reporting period.

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

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

Convertible Preferred Stock

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

For the three months ended March 31, 2023 and 2022, the Company has not experienced any material differences between accrued costs and actual costs incurred.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

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

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

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

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 payor rebates, chargebacks, discounts and fees, (c) product returns and (d) costs of co-pay assistance programs for patients, as well as other incentives.

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.

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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:

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

The Company pays the wholesalers and certain specialty pharmacies a fee for services such as:

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

2 unchanged sentences

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.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

Product Returns :

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

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

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 its returns estimate.

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

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

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

Rebates and Discounts:

The Company accrues rebates for contractually agreed-upon discounts with commercial insurance companies and mandated discounts under government programs such as the Medicaid Drug Rebate Program in the United States.

The Company's estimates for expected utilization of commercial insurance rebates are based on data received from its customers.

The Company's estimates for rebates under government programs are based on statutory discount rates and expected utilization as well as historical data it has accumulated since product launch.

Rebates are generally invoiced and paid in arrears so that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s activity, plus an accrual balance for known prior quarters’ unpaid rebates.

If actual rebates vary from estimates, the Company may need to adjust accruals, which would affect revenue in the period of adjustment.

Cost of Sales

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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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Stock-Based Compensation

4 unchanged sentences

The Company accounts for forfeitures as they occur.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

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

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

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

5 unchanged sentences

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

Foreign Currency Translation

The Company translates the assets and liabilities of its foreign subsidiaries where the local currencies have been determined to be the functional currencies into U.S.

dollars using current exchange rates.

Adjustments for foreign currency translation adjustments are recognized in other comprehensive income (loss) in the condensed consolidated statements of operations and comprehensive loss.

The earnings or loss of these subsidiaries are translated in U.S.

dollars using average exchange rates in effect during each reporting period.

Variable Interest Entities

2 unchanged sentences

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

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

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

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

The Company currently does not consolidate any VIEs.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Net Loss Per Share

5 unchanged sentences

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Fair Value Measurements

The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):

September 30, 2022

March 31, 2023

Level 1 Level 2 Level 3 Total

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ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

The following table summarizes the estimated value of the Company’s cash, cash equivalents and marketable securities, and the gross unrealized holding gains and losses (in thousands):

September 30, 2022

March 31, 2023

cost Unrealized

28 unchanged sentences

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

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

As of September 30, 2022 and December 31, 2021, unrealized credit losses on marketable securities were no t material, and accordingly, no allowance for credit losses were recorded.

As of September 30, 2022 and December 31, 2021, all securities have a maturity of 18 months or less and all securities with gross unrealized losses have been in a continuous loss position for less than one year.

Realized gains or losses on investments for the three months ended March 31, 2023 and 2022 were no t material.

As of March 31, 2023, it was determined that no credit losses exist, because the change in market value of those securities resulted from fluctuations in market interest rates since the time of purchase, rather than a deterioration of the credit worthiness of the issuers.

As of March 31, 2023 and December 31, 2022, 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.

The Company generally holds its marketable securities until maturity and does not intend to sell, and is not required to sell, the investments that are in an unrealized loss position before the recovery of their amortized cost basis.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

Balance Sheet Components

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Raw materials $ 6,461 $ 5,659

4 unchanged sentences

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

September 30, 2022 December 31, 2021

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

March 31, 2023 December 31, 2022

Prepaid insurance $ 2,199 $ 956

Prepaid co-pay assistance program 1,876 3,226

Prepaid clinical trial costs 1,135 172

3 unchanged sentences

Accrued liabilities consist of the following (in thousands):

September 30, 2022 December 31, 2021

Accrued compensation $ 11,538 $ 9,130

March 31, 2023 December 31, 2022

Clinical trial accruals $ 8,196 $ 7,896

Accrued compensation 5,990 14,000

Accrued sales deductions 3,125 1,567

3 unchanged sentences

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Computer hardware $ 1,066 $ 983

5 unchanged sentences

Property and equipment, net $ 2,070 $ 1,881

Depreciation expense was $ 157,000 and $ 462,000 for the three and nine months ended September 30, 2022, respectively, and $ 116,000 and $ 318,000 for the three and nine months ended September 30, 2021, respectively.

Depreciation expense was $ 175,000 and $ 150,000 for the three months ended March 31, 2023 and 2022, 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.

1 unchanged sentence

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

License Agreements & Acquisition

4 unchanged sentences

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

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.

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

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

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

Amortization expense during the three months ended March 31, 2023 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.

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

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

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

Royalty expense during the three months ended March 31, 2023 was not material.

There were no milestone payments made or payable in connection with AZ-Licensed Products for the three months ended March 31, 2023 and 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

Hengrui Exclusive Option and License Agreement

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

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

(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, and the European Union (including for clarity the United Kingdom).

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

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

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

There were no payments made or due in connection with Hengrui for the three months ended March 31, 2023 and 2022.

Hawkeye (Iolyx Therapeutics) Collaboration Agreement

7 unchanged sentences

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

Ducentis Biotherapeutics LTD Acquisition

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

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

As of March 31, 2023, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying unaudited condensed consolidated financial statements with respect to these contingent payments.

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

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

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

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

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

The Company accounted for this purchase as an in-process research and development asset acquisition and in the third quarter of 2022 recorded a charge to research and development expense in the amount of $ 29.6 million, which was not tax deductible.

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 lease terminates 91 months after December 31, 2020, 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, 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.

As of March 2022 and 2023, the Company reduced the letter of credit and related restricted cash account to $ 1.2 million and $ 0.9 million, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

2022 (October through December) $ 234

Thereafter 1,740

Notes to Condensed Consolidated Financial Statements

The minimum annual rental payments of the Company’s operating lease liability as of March 31, 2023 are as follows (in thousands):

2023 (April through December) $ 724

Total minimum lease payments $ 5,537

4 unchanged sentences

Total operating lease liability $ 4,614

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

There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the three and nine months ended September 30, 2022 and 2021.

Straight-line rent expense recognized for operating leases was $ 189,000 and $ 171,000 for the three months ended March 31, 2023 and 2022, respectively.

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

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows from operating activities

1 unchanged sentence

The following summarizes additional information related to the operating lease:

September 30, 2022

March 31, 2023

Weighted-average remaining lease term (in years) 5.3

1 unchanged sentence

Manufacturing Agreements

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

Firm future purchase commitments under these agreements are approximately $ 2.9 million within the next three months, and then approximately $ 2.1 million for 2023, and approximately $ 0.6 million per year for 2024 and 2025.

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 $ 5.1 million within the next nine months, and then approximately $ 0.8 million per year for 2024 and 2025.

This amount does not represent all of the Company’s anticipated purchases, but instead represents only the contractually obligated minimum purchases or firm commitments of non-cancelable minimum amounts.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

Indemnification

8 unchanged sentences

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.

12 unchanged sentences

(or on any successor or substitute published rate) for a term of one month, subject to a replacement with an alternate benchmark rate and spread in certain circumstances.

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

On March 31, 2023, the rate was 12.12 %.

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

2 unchanged sentences

The Company may voluntarily prepay principal amounts outstanding under the Term Loans in minimum increments of $ 5.0 million, subject to a prepayment premium of (i) 3.0 % of the principal amount of such Term Loan so prepaid prior to December 22, 2022, (ii) 2.0 % of the principal amount of such Term Loan so prepaid after December 22, 2022 and prior to December 22, 2023, or (iii) 1.0 % of the principal amount of such Term Loan so prepaid after December 22, 2023 and prior to December 22, 2025.

If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, the Company is required to make mandatory prepayments of (i) all principal amounts outstanding under the Term Loans, plus accrued and unpaid interest thereon through the prepayment date, (ii) any fees applicable by reason of such prepayment, (iii) the prepayment premiums set forth in the paragraph above, plus (iv) all other obligations that are due and payable, including expenses and interest at the Default Rate (as defined below) with respect to any past due amounts.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Notes to Condensed Consolidated Financial Statements

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

1 unchanged sentence

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 September 30, 2022.

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

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.

The Company was in compliance with all financial covenants under the Loan Agreement as of March 31, 2023.

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 the 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 September 30, 2022, the fair value of the embedded derivative was determined to be immaterial and will be remeasured at fair value each reporting period with any future changes in fair value reported in earnings.

At the inception of the Loan Agreement and at each balance sheet date through March 31, 2023, 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.

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The final maturity payment of $ 13.7 million is recognized over the life of the term loan through interest expense.

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

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

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

September 30, 2022 December 31, 2021

At March 31, 2023 and December 31, 2022, the effective interest rate was 14.23 % and 13.79 %, respectively.

Interest expense relating to the term loan for the three months ended March 31, 2023 and 2022 was $ 7.0 million and $ 1.8 million, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

The following summarizes additional information related to the Company's long-term debt (in thousands):

March 31, 2023 December 31, 2022

Principal loan balance $ 200,000 $ 200,000

2 unchanged sentences

Long-term debt, net $ 198,763 $ 197,769

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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.

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

Stockholders’ Equity

The holders of the Company’s common stock have one vote for each share of common stock.

1 unchanged sentence

The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares.

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

As of March 31, 2023, no dividends had been declared by the board of directors.

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Options issued and outstanding 8,343,760 7,476,223

4 unchanged sentences

On February 4, 2020, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $ 0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $ 0.0001 per share.

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

There were no shares of preferred stock outstanding as of March 31, 2023 and December 31, 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Stock-Based Compensation

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

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

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

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

1 unchanged sentence

Accordingly, on January 1, 2023, 2022 and 2021, the 2020 Plan reserve increased by 2,442,090 , 2,013,830 and 1,747,112 shares, respectively.

As of September 30, 2022, the Company had 1,061,783 shares available for future grant under the 2020 Plan.

As of March 31, 2023, the Company had 1,200,231 shares available for future grant under the 2020 Plan.

The 2020 Plan provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors, and consultants of the Company under terms and provisions established by the board of directors.

4 unchanged sentences

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

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

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

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

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

As of March 31, 2023, the Company had 1,541,500 shares available for future grant under the 2022 Plan.

Stock Option Activity

5 unchanged sentences

Expired ( 15,308 ) $ 26.22

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

Exercisable—September 30, 2022 (1)

Balance—March 31, 2023 8,343,760 $ 19.44 7.96 $ 11,983

Exercisable—March 31, 2023 (1)

3,805,706 $ 17.43 6.95 $ 11,132

1 unchanged sentence

(1) Options exercisable includes early exercisable options.

The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of September 30, 2022.

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of March 31, 2023.

The intrinsic value of options exercised for the three months ended March 31, 2023 was $ 0.4 million.

The total grant-date fair value of the options vested during the three months ended March 31, 2023 was $ 6.2 million.

The weighted-average grant-date fair value of employee options granted during the three months ended March 31, 2023 was $ 10.93 .

Restricted Stock Unit Activity

6 unchanged sentences

Forfeited ( 30,750 ) $ 23.01

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

Unvested Balance—March 31, 2023 2,807,215 $ 18.03

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

Stock-Based Compensation Expense

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

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

2022 2021 2022 2021

Three Months Ended March 31,

Research and development

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$ 9,479 $ 6,533

As of September 30, 2022, there was $ 64.6 million of total unrecognized compensation cost related to unvested options that are expected to vest, which is expected to be recognized over a weighted-average period of 2.8 years.

As of September 30, 2022, there was $ 27.6 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 3.3 years.

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

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

As of March 31, 2023, there was $ 61.3 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 2.7 years.

As of March 31, 2023, there was $ 46.8 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 3.4 years.

In determining the fair value of the stock options granted, the Company uses the Black-Scholes option-pricing model and assumptions discussed below.

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

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

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

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

The Company 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.

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

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

Nine Months Ended September 30, 2022 Year Ended

Three Months Ended March 31, 2023 Year Ended

December 31, 2022

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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 condensed consolidated balance sheets as of December 31, 2021.

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

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

2020 Employee Stock Purchase Plan

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

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

Stock-based compensation expense related to the ESPP was $ 216,000 and $ 637,000 for the three and nine months ended September 30, 2022, respectively, and $ 88,000 and $ 304,000 for the three and nine months ended September 30, 2021, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Financial Statements

As of March 31, 2023, the Company had 1,680,233 shares available for future grant under the ESPP.

Stock-based compensation expense related to the ESPP was $ 314,000 and $ 209,000 for the three months ended March 31, 2023 and 2022, respectively .

Net Loss Per Share

The following outstanding potentially dilutive shares have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

As of September 30,

As of March 31,

Stock options to purchase common stock 8,343,760 6,911,228

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

What changed 10-Q

Item 1. Financial Statements