What changed in this filing

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Item 1. Financial Statements

2023-11-03 compared with 2023-08-08 · 176 added, 92 removed, 690 unchanged (28% of the section changed)

3 unchanged sentences

(In thousands, except share and par value)

June 30, December 31,

September 30, December 31,

Current assets:

23 unchanged sentences

Preferred stock, $ 0.0001 par value;

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;

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

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

Common stock, $ 0.0001 par value;

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

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

61,861,736 and 61,052,250 shares issued at September 30, 2023 and December 31, 2022, respectively;

61,858,044 and 61,037,403 shares outstanding at September 30, 2023 and December 31, 2022, respectively

Additional paid-in capital 962,515 930,425

7 unchanged sentences

(In thousands, except share and per share data)

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

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

2023 2022 2023 2022

11 unchanged sentences

Interest expense ( 7,559 ) ( 4,899 ) ( 21,950 ) ( 8,737 )

Total other income (expense) ( 4,228 ) ( 1,579 ) ( 8,063 ) ( 3,275 )

Loss before income taxes

( 41,742 ) ( 107,709 ) ( 192,768 ) ( 239,439 )

Provision for income taxes

3,023 — 3,088 —

Net loss $ ( 44,765 ) $ ( 107,709 ) $ ( 195,856 ) $ ( 239,439 )

16 unchanged sentences

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

Issuance of shares of common stock for initial public offering, net of issuance costs of $ 634

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

882,353 — 14,366 — — 14,366

15 unchanged sentences

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.

25 unchanged sentences

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

Issuance of common stock upon the exercise of stock options 172,320 — 867 — — 867

Issuance of common stock upon the vesting of restricted stock units 51,988 — — — — —

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

Stock-based compensation expense — — 9,999 — — 9,999

Unrealized gain on marketable securities

— — — 165 — 165

Foreign currency translation adjustment

— — — ( 57 ) — ( 57 )

Net loss — — — — ( 44,765 ) ( 44,765 )

Balance—September 30, 2023 61,858,044 $ 6 $ 962,515 $ ( 184 ) $ ( 915,620 ) $ 46,717

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

2 unchanged sentences

(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

4 unchanged sentences

Amortization of intangible assets 563 125

Acquired in-process research and development

Net (accretion) amortization on marketable securities ( 5,517 ) 89

13 unchanged sentences

Purchases of property and equipment ( 422 ) ( 210 )

Net cash provided by investing activities 196,869 67,862

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

Milestone payment for intangible — ( 7,500 )

Net cash provided by (used in) investing activities

242,418 ( 129,400 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of common stock upon exercise of stock options 1,041 1,000

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

Proceeds from issuance of common stock, net of issuance costs — 161,592

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

Proceeds from long-term debt — 125,000

Payment of debt issuance costs — ( 2,187 )

Net cash provided by financing activities 2,034 300,836

5 unchanged sentences

Interest expense paid in cash $ 18,862 $ 6,923

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.

6 unchanged sentences

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 also received Health Canada approval of ZORYVE in plaque psoriasis 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.

6 unchanged sentences

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.

On October 24, 2023, the Company completed a public offering of its common stock and prefunded warrants to purchase shares of its common stock and received aggregate net proceeds of $ 94.0 million.

At-the-Market (ATM) Offerings

2 unchanged sentences

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 $ 870.9 million and $ 719.8 million as of June 30, 2023 and December 31, 2022, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 915.6 million and $ 719.8 million as of September 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 $ 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 had cash, cash equivalents, restricted cash, and marketable securities of $ 228.0 million and $ 410.8 million as of September 30, 2023 and December 31, 2022, respectively.

On October 24, 2023, the Company completed a public offering of its common stock and prefunded warrants to purchase shares of its common stock and received net proceeds of $ 94.0 million.

The Company has $ 200.0 million outstanding under the Loan Agreement as of September 30, 2023.

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.

3 unchanged sentences

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Summary of Significant Accounting Policies

13 unchanged sentences

Unaudited Interim Condensed Consolidated Financial Statements

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.

The interim condensed consolidated balance sheet as of September 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 nine months ended September 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 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 financial data and the other financial information disclosed in these notes to the condensed consolidated financial statements related to the three and nine month periods are also unaudited.

The condensed consolidated results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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.

7 unchanged sentences

Restricted Cash

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.

Notes to Condensed Consolidated Financial Statements

As of September 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.

Marketable Securities

13 unchanged sentences

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 June 30, 2023 and December 31, 2022.

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

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

3 unchanged sentences

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 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.

The Company capitalizes inventory costs associated

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized.

Intangible Assets, net

1 unchanged sentence

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 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

Amortization expense for the three and nine months ended September 30, 2023 was $ 188,000 and $ 563,000 , respectively.

Amortization expense for the three and nine months ended September 30, 2022 was $ 125,000 .

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

2023 (October through December) $ 188

Thereafter 3,438

39 unchanged sentences

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

18 unchanged sentences

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

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.

For the three and nine months ended September 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.

51 unchanged sentences

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

Other Revenues

Other revenues is related to the Huadong License and Collaboration Agreement.

The Company evaluated the agreement with Huadong and determined that it is within the scope of ASC 606.

The Company applied the five-step model as required by ASC 606 to determine revenue recognition.

The nonrefundable upfront payment that the Company received in September 2023 in connection with the transfer of the license and related know-how to Huadong was determined to be a distinct performance obligation, and therefore was recognized in Other revenues.

The Company evaluated whether the development and regulatory milestones are considered probable of being reached and determined that their achievement is highly dependent on factors outside of the Company’s control.

Therefore, these payments are subject to significant revenue reversal and are therefore not included in the transaction price.

At the end of each reporting period, the Company will re-evaluate the probability of achievement of each milestone and, if necessary, adjust its estimate of the overall transaction price and accordingly recognize the related revenue once the probability of significant reversal of revenue is low.

Any such adjustments are recorded on a cumulative catch-up basis, and would be reported in Other revenues in the period of adjustment.

The sales milestones and royalties will be recognized in Other revenues when the related sales occur.

Cost of Sales

29 unchanged sentences

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

Income tax expense of $ 3.0 million and $ 3.1 million for the three and nine months ended September 30, 2023, respectively, were primarily due to income tax expense related to withholding tax on the Huadong License and Collaboration Agreement.

Foreign Currency Translation

15 unchanged sentences

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

June 30, 2023

September 30, 2023

Level 1 Level 2 Level 3 Total

2 unchanged sentences

Commercial paper — 26,516 — 26,516

Corporate debt securities — 3,960 — 3,960

Treasury securities 93,126 — — 93,126

23 unchanged sentences

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

June 30, 2023

September 30, 2023

cost Unrealized

7 unchanged sentences

Commercial paper $ 26,516 $ — $ — $ 26,516

Corporate debt securities 3,965 — ( 6 ) 3,959

Treasury securities 93,195 5 ( 74 ) 93,126

18 unchanged sentences

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

Realized gains or losses on investments for the three and six months ended June 30, 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.

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

As of September 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 September 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.

3 unchanged sentences

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Raw materials $ 11,200 $ 5,659

4 unchanged sentences

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Prepaid co-pay assistance program $ 4,948 $ 3,226

5 unchanged sentences

Accrued liabilities consist of the following (in thousands):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Accrued compensation $ 13,741 $ 14,000

5 unchanged sentences

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Computer hardware $ 1,128 $ 983

5 unchanged sentences

Property and equipment, net $ 1,735 $ 1,881

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.

Depreciation expense was $ 200,000 and $ 573,000 for the three and nine months ended September 30, 2023, respectively, and $ 157,000 and $ 462,000 for the three and nine months ended September 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.

3 unchanged sentences

License Agreements & Acquisition

Huadong License and Collaboration Agreement

In August 2023, the Company entered into a license and collaboration agreement with Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd (“Huadong”), a wholly owned subsidiary of Huadong Medicine Co., Ltd.

Pursuant to the terms of the agreement, the Company granted to Huadong an exclusive, sublicensable (under certain circumstances) license under certain patent rights and know-how controlled by the Company for Huadong to develop, conduct medical affairs activities for, manufacture, commercialize, and otherwise exploit both cream and foam topical roflumilast for all therapeutic uses for certain dermatological indications ("Huadong Licensed Products") in Greater China (mainland China, Hong Kong, Macau, and Taiwan) and Southeast Asia (Indonesia, Singapore, The Philippines, Thailand, Myanmar, Brunei, Cambodia, Laos, Malaysia, and Vietnam) ("Huadong Territories").

Huadong will, at its expense, develop, obtain regulatory approval for, commercialize, and conduct medical affairs activities for the Huadong Licensed Products, subject to certain of the Company’s approval and oversight rights.

The Company will retain exclusive rights for the development, manufacture and commercialization of topical roflumilast outside the Huadong Territories.

As consideration for the rights granted under the Huadong Agreement, Huadong paid the Company a non-refundable upfront fee pursuant to the terms of the agreement, upon closing in September 2023.

The Company received a net payment of $ 27.0 million, which consisted of a $ 30.0 million upfront payment less the applicable tax withholding obligation in China of $ 3.0 million.

The Company may also potentially receive additional payments:

(i) up to an aggregate amount of $ 24.0 million upon the achievement of certain development and regulatory milestones, (ii) up to an aggregate amount of $ 40.3 million upon the achievement of certain sales milestones, and (iii) low double-digit to high-teen double-digit tiered percentage royalties on net sales of the Huadong Licensed Products.

The term of the Huadong Agreement continues on a Licensed Product-by-Licensed Product and country or region-by-country or region basis, until the expiration of the Royalty Term, which is:

(i) the date of expiration of the last valid patent claim related to the Huadong Licensed Products, (ii) ten years after the first commercial sale of a the Huadong Licensed Product and (iii) the expiration of any regulatory exclusivity as to a Huadong Licensed Product.

The License Agreement may be terminated by both parties under certain circumstances.

Other revenue and related income tax expense recognized under the Huadong agreement was $ 30.0 million and $ 3.0 million, respectively, for the three and nine months ended September 30, 2023.

AstraZeneca License Agreement

4 unchanged sentences

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 and six months ended June 30, 2023 was not material.

The Company is amortizing the intangible asset to cost of sales over its useful life of 10 years from

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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 and nine months ended September 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 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.

Notes to Condensed Consolidated Financial Statements

Royalty expense during the three and nine months ended September 30, 2023 was not material.

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

Hengrui Exclusive Option and License Agreement

8 unchanged sentences

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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.

1 unchanged sentence

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.

Notes to Condensed Consolidated Financial Statements

Ducentis Biotherapeutics LTD Acquisition

2 unchanged sentences

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 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.

As of September 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.

10 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

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

2023 (October through December) $ 241

Total minimum lease payments $ 5,054

4 unchanged sentences

Total operating lease liability $ 4,285

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.

There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the three and six months ended June 30, 2023 and 2022.

Straight-line rent expense recognized for operating leases was $ 184,000 and $ 551,000 for the three and nine months ended September 30, 2023, and $ 186,000 and $ 530,000 for the three and nine months ended September 30, 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):

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities

1 unchanged sentence

The following summarizes additional information related to the operating lease:

June 30, 2023

September 30, 2023

Weighted-average remaining lease term (in years) 4.8

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 $ 4.9 million within the next six months, and then approximately $ 0.8 million per year for 2024 and 2025.

Firm future purchase commitments under these agreements are approximately $ 1.2 million within the next three 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.

15 unchanged sentences

Long-term debt

On December 22, 2021, the Company entered into a Loan Agreement with SLR Investment Corp.

On December 22, 2021, the Company entered into a loan and security agreement, or Loan Agreement, with SLR Investment Corp.

(SLR) and the lenders party thereto.

The Loan Agreement was amended and restated on January 10, 2023 to include Arcutis Canada, Inc.

as a borrower and party to the Loan Agreement.

The lenders agreed to extend term loans to the Company in an aggregate principal amount of up to $ 225.0 million, comprised of (i) a tranche A term loan of $ 75.0 million, (ii) a tranche B-1 term loan of $ 50.0 million, (iii) a tranche B-2 term loan of up to $ 75.0 million, available in minimum increments of $ 15.0 million, and (iv) a tranche C term loan of up to $ 25.0 million (Term Loans).

7 unchanged sentences

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

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

On September 30, 2023, the rate was 12.88 %.

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

7 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 pursuant to the Loan and Security Agreement;

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 June 30, 2023.

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

At the inception of the Loan Agreement and at each balance sheet date through September 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.

1 unchanged sentence

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

On November 1, 2023, the Company entered into an amendment to the Loan Agreement with SLR.

Pursuant to the amendment, the terms of the Loan Agreement were revised to, among others, (i) eliminate the undrawn tranche C term loan of up to $ 25.0 million, (ii) modify the financial covenant relating to minimum net product revenue, and (iii) include an additional minimum financing covenant.

The amended Loan Agreement provides for term loans to the Company in aggregate principal amount of up to $ 200.0 million, which amounts were fully drawn as of September 30, 2023.

See Note 12 for additional information.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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

1 unchanged sentence

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

At June 30, 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.

Notes to Condensed Consolidated Financial Statements

At September 30, 2023 and December 31, 2022, the effective interest rate was 14.79 % and 13.79 %, respectively.

Interest expense relating to the term loan for the three and nine months ended September 30, 2023 was $ 7.6 million and $ 22.0 million, respectively.

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

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Principal loan balance $ 200,000 $ 200,000

7 unchanged sentences

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

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

As of September 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:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Options issued and outstanding 8,228,270 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 June 30, 2023 and December 31, 2022.

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

ARCUTIS BIOTHERAPEUTICS, INC.

6 unchanged sentences

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 June 30, 2023, the Company had 1,289,068 shares available for future grant under the 2020 Plan.

As of September 30, 2023, the Company had 1,487,426 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.

7 unchanged sentences

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

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

As of September 30, 2023, the Company had 915,425 shares available for future grant under the 2022 Plan.

Stock Option Activity

5 unchanged sentences

Expired ( 137,258 ) $ 26.75

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

Exercisable—June 30, 2023 (1)

Balance—September 30, 2023 8,228,270 $ 18.81 7.51 $ 3,269

Exercisable—September 30, 2023 (1)

4,571,413 $ 18.62 6.59 $ 3,269

3 unchanged sentences

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 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 .

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, 2023.

The intrinsic value of options exercised for the nine months ended September 30, 2023 was $ 1.2 million.

The total grant-date fair value of the options vested during the nine months ended September 30, 2023 was $ 22.1 million.

The weighted-average grant-date fair value of employee options granted during the nine months ended September 30, 2023 was $ 8.76 .

Restricted Stock Unit Activity

6 unchanged sentences

Forfeited ( 266,650 ) $ 18.81

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

Unvested Balance—September 30, 2023 2,924,356 $ 18.47

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

3 unchanged sentences

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

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

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

2023 2022 2023 2022

4 unchanged sentences

$ 9,999 $ 8,789 $ 30,056 $ 23,418

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.

As of September 30, 2023, there was $ 46.2 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 2.4 years.

As of September 30, 2023, there was $ 40.0 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 3.0 years.

ARCUTIS BIOTHERAPEUTICS, INC.

11 unchanged sentences

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

Six Months Ended June 30, 2023 Year Ended

Nine Months Ended September 30, 2023 Year Ended

December 31, 2022

15 unchanged sentences

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

As of September 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 $ 234,000 and $ 781,000 for the three and nine months ended September 30, 2023, respectively, and $ 216,000 and $ 637,000 for the three and nine months ended September 30, 2022, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

2 unchanged sentences

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

As of June 30,

As of September 30,

Stock options to purchase common stock 8,228,270 7,480,040

3 unchanged sentences

Total 11,229,576 9,122,294

Subsequent Events

On October 24, 2023, the Company completed an offering relating to the sale of securities consisting of:

(i) 32,500,000 shares of the Company's common stock at $ 2.50 per share, and (ii) prefunded warrants to purchase 7,500,000 shares of the Company's common stock at $ 2.4999 per underlying share of common stock.

The exercise price of the warrants is $ 0.0001 per underlying share of common stock.

The prefunded warrants are exercisable at any time on or after their original issuance.

The aggregate net proceeds to the Company was $ 94.0 million after deducting underwriting discounts, commissions and estimated offering expenses payable by the Company.

The Company has granted the underwriters an option to purchase up to an additional 6,000,000 shares of the Company's common stock at $ 2.50 per share.

This option is exercisable, in whole or in part, for a period of 30 days from the date of the underwriting agreement executed in connection with the offering.

Loan Agreement Amendment

On November 1, 2023, the Company entered into an amendment to the Loan Agreement with SLR.

Pursuant to the amendment, the terms of the Loan Agreement were revised to, among others, (i) eliminate the undrawn tranche C term loan of up to $ 25.0 million, (ii) modify the financial covenant relating to minimum net product revenue and remove the market capitalization threshold, and (iii) include an additional minimum financing covenant.

The amended Loan Agreement provides for term loans to the Company in aggregate principal amount of up to $ 200.0 million, which amounts were fully drawn as of September 30, 2023.

Pursuant to the amendment, the modified financial covenant requires the Company to generate a minimum net product revenue equal to 75 % of each month's projected net product revenue as set forth in the Company's annual plan for the respective period, tested on a trailing 12 month basis for the month ending December 31, 2023 and then tested on a trailing six month basis, as of the end of each month, for the month ending January 31, 2024 and each month thereafter.

Pursuant to the amendment, each annual plan shall be approved by the Company’s board of directors and SLR, in its capacity as collateral agent, in its reasonable discretion.

Any failure by the Company to deliver such annual plan on or before December 15 of the prior year shall be an immediate event of default.

In addition, the Company agreed to raise at least $ 31.0 million in net cash proceeds, during the period commencing on November 1, 2023 and ending on April 1, 2024, from (a) the sale or issuance of the Company’s equity interests, (b) business development or collaboration agreements (including upfront, milestone, royalty and other payments), or (c) subordinated debt, in each case as permitted pursuant to the terms of the Loan Agreement.

Any failure by the Company to raise such net cash proceeds during the specified period shall be an immediate event of default.

See Note 8 for additional information regarding the Loan Agreement.

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