What changed in this filing

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Item 1. Financial Statements

2023-08-08 compared with 2023-05-09 · 154 added, 117 removed, 628 unchanged (30% of the section changed)

3 unchanged sentences

(In thousands, except share and par value)

March 31, December 31,

June 30, December 31,

Current assets:

1 unchanged sentence

Restricted cash 925 1,234

Trade receivables, net 12,769 8,458

Marketable securities 163,557 355,948

Trade receivables, net 17,207 8,458

Inventories 10,474 7,514

18 unchanged sentences

Preferred stock, $ 0.0001 par value;

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;

10,000,000 shares authorized at June 30, 2023 and December 31, 2022;

no shares issued and outstanding at June 30, 2023 and December 31, 2022;

Common stock, $ 0.0001 par value;

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

300,000,000 shares authorized at June 30, 2023 and December 31, 2022;

61,637,428 and 61,052,250 shares issued at June 30, 2023 and December 31, 2022, respectively;

61,630,018 and 61,037,403 shares outstanding at June 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 951,649 930,425

7 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended March 31,

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

2023 2022 2023 2022

Product revenue, net $ 4,770 $ — $ 7,551 $ —

Other revenue 420 — 420 —

Total revenues 5,190 — 7,971 —

33 unchanged sentences

Stock-based compensation expense — — 6,533 — — 6,533

Unrealized gain on marketable securities — — — ( 765 ) — ( 765 )

Unrealized loss on marketable securities — — — ( 765 ) — ( 765 )

Net loss — — — — ( 64,324 ) ( 64,324 )

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

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

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

Vesting of founder shares subject to repurchase — — — — — —

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

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

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

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

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

Common Stock Additional

7 unchanged sentences

Stock-based compensation expense — — 9,479 — — 9,479

Unrealized loss on marketable securities — — — 724 — 724

Unrealized gain on marketable securities — — — 724 — 724

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

1 unchanged sentence

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 35,700 — 74 — — 74

Issuance of common stock upon the vesting of restricted stock units 77,221 — — — — —

Vesting of founder shares subject to repurchase — — — — — —

Lapse of repurchase rights related to common stock issued pursuant to early exercises 3,719 — — — — —

Shares issued pursuant to the employee stock purchase plan 155,446 — 993 — — 993

Stock-based compensation expense — — 10,578 — — 10,578

Unrealized gain on marketable securities — — — 128 — 128

Foreign currency translation adjustment — — — ( 6 ) — ( 6 )

Net loss — — — — ( 70,991 ) ( 70,991 )

Balance—June 30, 2023 61,630,018 $ 6 $ 951,649 $ ( 292 ) $ ( 870,855 ) $ 80,508

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

2 unchanged sentences

(In thousands)

Three Months Ended March 31,

Six Months Ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

23 unchanged sentences

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

Proceeds from issuance of common stock pursuant to employee stock purchase plan 993 976

Net cash provided by financing activities 1,167 15,847

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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 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.

commercialization in August 2022.

The Company also received Health Canada approval of ZORYVE on April 28, 2023 and began Canadian commercialization in June 2023.

The Company's current portfolio is comprised of what management believes to be 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’s strategy is to focus on validated biological targets and to use, its 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.

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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.

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.

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 870.9 million and $ 719.8 million as of June 30, 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 had cash, cash equivalents, restricted cash, and marketable securities of $ 269.6 million and $ 410.8 million as of June 30, 2023 and December 31, 2022, respectively.

The Company has $ 200.0 million outstanding under the Loan Agreement as of June 30, 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.

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

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

The condensed consolidated financial statements include the Company's wholly-owned subsidiaries.

All material intercompany balances and transactions have been eliminated.

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Unaudited Interim Condensed Consolidated Financial Statements

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.

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

As of June 30, 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 the Company's amended office space lease.

ARCUTIS BIOTHERAPEUTICS, INC.

11 unchanged sentences

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.

The Company’s trade accounts receivable consists of amounts due primarily from pharmaceutical wholesalers and specialty pharmacy providers in the United States and Canada (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 March 31, 2023 and December 31, 2022.

The reserve amount for estimated losses was not material as of June 30, 2023 and December 31, 2022.

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

6 unchanged sentences

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.

3 unchanged sentences

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 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

Amortization expense for the three and six months ended June 30, 2023 was $ 188,000 and $ 376,000 , respectively.

Estimated future amortization expense for the intangible assets subsequent to June 30, 2023 is as follows (in thousands):

2023 (July through December) $ 374

Thereafter 3,438

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

Valuation of Other Investments

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 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.

The Company accounts for its equity interest in common stock in Iolyx Therapeutics Inc.

("Iolyx", formerly known as Hawkeye Therapeutics, Inc.) in accordance with Accounting Standards Codification (“ASC”) 321, Investments – Equity Securities (“ASC 321”).

Under ASC 321, the Company elects to utilize the allowed "measurement alternative", and measures the investment at cost, minus impairment and any changes, plus or minus, resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The carrying value is included in Other assets and changes are recognized in Other income (expense).

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Concentration of Credit Risk and Other Risks and Uncertainties

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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 months ended March 31, 2023 and 2022.

There were no impairments recognized during the three and six months ended June 30, 2023 and 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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

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

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 Consolidated Financial Statements

For the three and six months ended June 30, 2023 and 2022, the Company has not experienced any material differences between accrued costs and actual costs incurred.

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 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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Product Revenue, Net

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

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

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.

In accordance with ASC 606, the Company recognizes net product revenue 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.

Revenue 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.

1 unchanged sentence

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.

The amount of variable consideration that is included in the transaction price may be constrained and is included in net product revenue 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.

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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 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 Consolidated Financial Statements

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 revenue and accounts receivable at the time such revenue is recognized.

Product Returns :

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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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Rebates and Discounts:

5 unchanged sentences

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 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 revenue, 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.

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

Variable Interest Entities

If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity.

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 currently does not consolidate any VIEs.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Net Loss Per Share

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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 Consolidated 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):

March 31, 2023

June 30, 2023

Level 1 Level 2 Level 3 Total

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

March 31, 2023

June 30, 2023

cost Unrealized

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

Realized gains or losses on investments for the three months ended March 31, 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.

Realized gains or losses on investments for the three and six months ended June 30, 2023 and 2022 were no t material.

As of June 30, 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 June 30, 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.

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Raw materials $ 7,976 $ 5,659

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

March 31, 2023 December 31, 2022

Prepaid insurance $ 2,199 $ 956

June 30, 2023 December 31, 2022

Prepaid co-pay assistance program $ 2,164 $ 3,226

Prepaid insurance 1,549 956

Prepaid clinical trial costs 691 172

3 unchanged sentences

Accrued liabilities consist of the following (in thousands):

March 31, 2023 December 31, 2022

Clinical trial accruals $ 8,196 $ 7,896

June 30, 2023 December 31, 2022

Accrued compensation $ 8,952 $ 14,000

Accrued sales deductions 4,883 1,567

Clinical trial accruals 2,801 7,896

Accrued expenses and other current liabilities 2,172 4,860

2 unchanged sentences

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Computer hardware $ 1,060 $ 983

5 unchanged sentences

Property and equipment, net $ 1,867 $ 1,881

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

Depreciation expense was $ 198,000 and $ 373,000 for the three and six months ended June 30, 2023, respectively, and $ 155,000 and $ 305,000 for the three and six months ended June 30, 2022.

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

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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 March 31, 2023 was not material.

Amortization expense during the three and six months ended June 30, 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.

1 unchanged sentence

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 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.

Royalty expense during the three and six months ended June 30, 2023 was not material.

There were no milestone payments made or payable in connection with AZ-Licensed Products for the three and six months ended June 30, 2023 and 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

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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 months ended March 31, 2023 and 2022.

Hawkeye (Iolyx 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.

There were no payments made or due in connection with Hengrui for the three and six months ended June 30, 2023 and 2022.

Iolyx Collaboration Agreement

In June 2019, the Company entered into a collaboration agreement, or Iolyx Agreement, with Iolyx, a related party with common ownership, for the development of clinical compounds, including roflumilast.

The Iolyx Agreement grants Iolyx an exclusive license to certain intellectual property developed under the agreement as it relates to the development of new applications of such compounds.

Contemporaneously with the execution of the Iolyx Agreement, the Company entered into a stock purchase agreement, purchasing 995,000 shares of Iolyx's common stock at $ 0.0001 per share, representing 19.9 % of the outstanding common stock of Iolyx at the time of the purchase.

In accordance with the Iolyx Agreement and in conjunction with Iolyx’s sale and issuance of Series A convertible preferred stock, Iolyx issued 4,256,686 fully-paid fully-vested shares of common stock to the Company.

As a result of this issuance of common stock, the Company recorded $ 0.4 million in Other revenue in the three months ended June 30, 2023.

Also, in conjunction with the issuance of the Series A convertible preferred stock, the Company revalued its common stock acquired with the execution of the Iolyx agreement, resulting in $ 0.1 million recognized in Other income (expense).

There are no other upfront payments, milestones, or royalties pursuant to the Iolyx Agreement.

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

ARCUTIS BIOTHERAPEUTICS, INC.

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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 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.

As of June 30, 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.

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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.

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.

In 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 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

The minimum annual rental payments of the Company’s operating lease liability as of June 30, 2023 are as follows (in thousands):

2023 (July through December) $ 482

Total minimum lease payments $ 5,295

4 unchanged sentences

Total operating lease liability $ 4,450

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.

There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the three months ended March 31, 2023 and 2022.

Straight-line rent expense recognized for operating leases was $ 177,000 and $ 366,000 for the three and six months ended June 30, 2023, respectively, and $ 173,000 and $ 344,000 for the three and six months ended June 30, 2022.

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

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities

1 unchanged sentence

The following summarizes additional information related to the operating lease:

March 31, 2023

June 30, 2023

Weighted-average remaining lease term (in years) 5.1

2 unchanged sentences

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.

Firm future purchase commitments under these agreements are approximately $ 4.9 million within the next six 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.

12 unchanged sentences

License Agreements

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

The terms of certain of the Company's 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.

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

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

On June 30, 2023, the rate was 12.61 %.

Starting in July 2023, the Secured Overnight Financing Rate (SOFR) for a term of one month was substituted for the benchmark rate.

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

6 unchanged sentences

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 financial covenants under the Loan Agreement as of March 31, 2023.

The Company was in compliance with all financial covenants under the Loan Agreement as of June 30, 2023.

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 the Company and the collateral securing the Term Loans.

2 unchanged sentences

The prepayment upon default and other potential additional interest provisions under the Loan Agreement were determined to be a compound embedded derivative instrument to be bifurcated from the loan and accounted for as a separate liability for accounting purposes under the guidance in ASC 815, Derivatives and Hedging .

At the inception of the Loan Agreement and 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.

At the inception of the Loan Agreement and at each balance sheet date through June 30, 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 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.

At June 30, 2023 and December 31, 2022, the effective interest rate was 14.61 % and 13.79 %, respectively.

Interest expense relating to the term loan for the three and six months ended June 30, 2023 was $ 7.4 million and $ 14.4 million, respectively, and $ 2.0 million and $ 3.8 million for the three and six months ended June 30, 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

1 unchanged sentence

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Principal loan balance $ 200,000 $ 200,000

2 unchanged sentences

Long-term debt, net $ 199,767 $ 197,769

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.

Upon the contractual maturity of the Company's long term debt, a payment of principal and final fees of $ 213.9 million is due on January 1, 2027.

Stockholders’ Equity

2 unchanged sentences

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

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

As of June 30, 2023, no dividends had been declared by the board of directors.

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Options issued and outstanding 8,257,763 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 March 31, 2023 and December 31, 2022.

There were no shares of preferred stock outstanding as of June 30, 2023 and December 31, 2022.

ARCUTIS BIOTHERAPEUTICS, INC.

3 unchanged sentences

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

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

As of June 30, 2023, the Company had 1,289,068 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.

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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.

As of June 30, 2023, the Company had 1,320,260 shares available for future grant under the 2022 Plan.

Stock Option Activity

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Expired ( 76,367 ) $ 26.99

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

Exercisable—March 31, 2023 (1)

Balance—June 30, 2023 8,257,763 $ 19.26 7.66 $ 9,521

Exercisable—June 30, 2023 (1)

4,356,782 $ 17.72 6.70 $ 9,250

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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 .

The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of June 30, 2023.

The intrinsic value of options exercised for the six months ended June 30, 2023 was $ 0.7 million.

The total grant-date fair value of the options vested during the six months ended June 30, 2023 was $ 14.9 million.

The weighted-average grant-date fair value of employee options granted during the six months ended June 30, 2023 was $ 10.25 .

Restricted Stock Unit Activity

The following table summarizes information regarding our RSUs:

The following table summarizes information regarding the Company's RSUs:

Number of Units Weighted-Average

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Forfeited ( 117,550 ) $ 20.16

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.

Unvested Balance—June 30, 2023 2,912,694 $ 17.27

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

RSUs generally vest equally over four years .

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

Three Months Ended March 31,

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

2023 2022 2023 2022

Research and development

3 unchanged sentences

$ 10,578 $ 8,096 $ 20,057 $ 14,629

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.

As of June 30, 2023, there was $ 53.6 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 2.5 years.

As of June 30, 2023, there was $ 44.4 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 3.2 years.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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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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.

1 unchanged sentence

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

Three Months Ended March 31, 2023 Year Ended

Six Months Ended June 30, 2023 Year Ended

December 31, 2022

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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 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 .

As of June 30, 2023, the Company had 1,524,787 shares available for future grant under the ESPP.

Stock-based compensation expense related to the ESPP was $ 233,000 and $ 547,000 for the three and six months ended June 30, 2023, respectively, and $ 212,000 and $ 421,000 for the three and six months ended June 30, 2022, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Net Loss Per Share

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

As of March 31,

As of June 30,

Stock options to purchase common stock 8,257,763 7,270,277

4 unchanged sentences

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