What changed in this filing

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Item 9A. Controls and Procedures

2024-02-27 compared with 2023-02-28 · 389 added, 341 removed, 819 unchanged (47% of the section changed)

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Based on the results of our assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2023.

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

Index to Financial Statements

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting during the year ended December 31, 2022 covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There was no change in our internal controls over financial reporting during the three months ended December 31, 2023 covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls and Procedures

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(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Index to Financial Statements

Management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our internal controls will prevent or detect all errors and all fraud.

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Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

Opinion on Internal Control Over Financial Reporting

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

In our opinion, Arcutis Biotherapeutics, Inc.

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

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

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Los Angeles, California

February 28, 2023

Index to Financial Statements

OTHER INFORMATION

During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.

We have adopted an insider trading policy and procedures governing the purchase, sale, and/or other dispositions of the our securities by directors, officers, employees and other covered persons that we believe are reasonably designed to promote compliance with insider trading laws, rules and regulations, and the listing requirements of the Nasdaq Global Select Market.

This policy imposes regular blackout periods during which certain individuals may not transact in our securities and pre-clearance procedures for transactions by certain specified individuals, including, among others, the members of our board of directors and our executive officers.

In addition, this policy prohibits certain transactions that we have determined are higher risk or for which there is a heightened appearance of potential improper or inappropriate conduct, including short sales of our securities, options trading in puts, calls or other derivative securities involving our equity securities, hedging transactions, and margin accounts and pledging of our securities.

We regularly review our insider trading policy with our board of directors and management.

A copy of our insider trading policy and procedures is filed as Exhibit 19 to this Annual Report on Form 10-K.

The remaining information required by this item is incorporated by reference to our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.

EXECUTIVE COMPENSATION

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PRINCIPAL ACCOUNTING FEES AND SERVICES

Index to Financial Statements

The information required by this item is incorporated by reference to our definitive proxy statement relating to our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.

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Consolidated Statements of Operations and Comprehensive Loss

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

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

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10-K 3/19/20 4.3

4.4 F orm of Pre-Funded Warrant

10.1# Form of Indemnity Agreement.

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S-1/A 1/21/20 10.5

10.7# Offer Letter, dated January 9, 2020, by and between the Registrant and David W.

S-1/A 1/21/20 10.6

10.8# Offer Letter, dated January 9, 2020, by and between the Registrant and Howard G.

S-1/A 1/21/20 10.7

10.9# Offer Letter, dated January 9, 2020, by and between the Registrant and John W.

S-1/A 1/21/20 10.8

10.10# Offer Letter, dated January 9, 2020, by and between the Registrant and Kenneth A.

S-1/A 1/21/20 10.9

10.11# Offer Letter, dated January 9, 2020, by and between the Registrant and Patricia A.

S-1/A 1/21/20 10.10

Consulting Agreement, dated August 16, 2016, by and between Bhaskar Chaudhuri and the Registrant.

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S-1/A 1/21/20 10.17

10.19# Severance & Change in Control Agreement, by and between the Registrant and David W.

S-1/A 1/21/20 10.18

10.20# Severance & Change in Control Agreement, by and between the Registrant and Howard G.

S-1/A 1/21/20 10.19

10.21# Severance & Change in Control Agreement, by and between the Registrant and John W.

S-1/A 1/21/20 10.20

Index to Financial Statements

10.22 Severance & Change in Control Agreement, by and between the Registrant and Kenneth A.

S-1/A 1/21/20 10.21

10.23 Severance & Change in Control Agreement, by and between the Registrant and Patricia A.

S-1/A 1/21/20 10.22

10.14 Offer Letter, dated December 18, 2020, by and between the Registrant and Matthew R.

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10-Q 11/8/22 10.2

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

10-Q 5/6/21 10.2

10.30 Sales Agreement, dated May 6, 2021, by and between the Registrant and Cowen and Company, LLC.

10-Q 5/6/21 10.3

Supply and Manufacturing Agreement, dated September 15, 2021, between DPT Laboratories, Ltd.

1 unchanged sentence

10-Q 11/4/21 10.1

Index to Financial Statements

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

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and the lenders party thereto.

10.24 F irst Amendment to Amended and Restated Loan and Security Agreement dated November 1, 2023, by and amo ng the Registrant, SLR Investment Corp., and the lenders party thereto.

10.25 Non-Employee Director Compensation Program

10.26 Form of Non-Employee Director RSU Deferral Election

License Agreement, dated August 10, 2023, by and between the Registrant and Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd .

10.30 E mployment Agreement , dated September 1, 2023, by and between John Smither and the Registrant

S everance & C h a nge in Control Agreement, dated Septem ber 6, 2023, by and between John Smither and the Registrant

E mployment Agreement, dated as of Sep tember 16, 2023, by and between Todd Edwards and the Registrant

S everance and Change in Control Agreement, dated September 16, 2023, by and between Todd Edwards and the Registrant

A mended an d Restated Sales Agreement, dated January 31, 2024, by and between Registrant and Cowen and Company, LLC

10.35 Ame ndment Employment Agreement , dated February 22, 2024, by and between the Regist rant and Matthew R.

19 Insider Trading Policy and Procedures

23.1 Consent of Independent Registered Public Accounting Firm.

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Index to Financial Statements

97.1 Arcutis Biotherapeutics, Inc.

Policy for Reco very of Erroneously Awarded Compensation

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

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generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023, expressed an unqualified opinion thereon.

The Company's Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has not yet met a requirement under its loan agreement to raise capital by April 1, 2024, has recurring losses from operations, and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.

Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1.

The 2023 consolidated financial statements do not include any adjustments to reflect the possible future effects on the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Basis for Opinion

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Index to Financial Statements

Accrued Clinical Trial Costs

Sales deductions

Description of

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

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

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

Auditing the Company’s accounting for accrued clinical trial costs was challenging because calculating the liability for clinical trial activity includes determining the progress or stage of completion of the activities within each clinical trial based on internal and external information, and involves a high volume of data.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s process for estimating accrued clinical trial costs, including controls over management’s measurement of clinical trial progress and the related estimates of costs incurred.

We also tested controls over management’s review of the completeness and accuracy of data used in determining the accruals.

To test the adequacy of the Company’s accrued clinical trial costs, we performed audit procedures that included, among others, inspecting correspondence between internal clinical trial study managers and external clinical trial service providers for selected clinical trials and performing corroborative inquiries of accounting personnel and internal clinical project managers to validate the progress of clinical trial activities.

To assess the appropriate measurement of accrued clinical trial costs, we reviewed significant agreements, and associated amendments and change orders, obtained external confirmation of key study dates and patient enrollment status directly with the CROs, selected a sample of transactions to inspect invoices, and vouched payments to bank statements.

Additionally, we reviewed payments made subsequent to year-end to evaluate the completeness of the accrued clinical trial costs.

As of December 31, 2023, the Company recorded accrued sales deductions of $11.6 million.

As described in Note 2 to the consolidated financial statements, revenues from product sales are recognized net of variable consideration for invoice discounts for prompt payment and distribution service fees, government and private payer rebates, chargebacks, discounts and fees, product returns and costs of co-pay assistance programs, which are collectively recorded at the time of sale.

Auditing the Company’s accounting for accrued sales deductions related to co-pay assistance programs and managed care rebates, is complex and requires significant judgment.

Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon delivery, and is based on an amount that reflects the consideration to which the Company expects to be entitled, which represents an amount that is net of accruals for estimated sales deductions.

The accrued sales deductions related to co-pay assistance programs are estimated based on historical program payments and utilization.

The accrued sales deductions related to managed care rebates are based on current contractual arrangements, market events and trends, external historical data, and forecasted customer buying patterns and patient utilization.

Addressed the

Matter in Our

To test the adequacy of the Company’s accrued sales deductions for co-pay assistance programs and managed care rebates, we obtained management’s calculations for the respective estimates and performed the following procedures, among others.

For accrued managed care rebates, we tested management’s estimation process by developing an independent expectation of the estimated accrual balance based upon actual historical payment data.

We also validated terms and conditions for a sample of contracts to the executed agreement and tested a sample of payments made throughout the year.

For accrued co-pay assistance programs, we assessed the company’s assumptions of distributor inventory quantities by agreeing the quantities to third party reports.

We also assessed the historical share and payment rate assumptions by testing a sample of the historical payments and program utilization.

/s/ Ernst & Young LLP

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Preferred stock, $ 0.0001 par value;

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

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

10,000,000 shares authorized;

no shares issued and outstanding

Common stock, $ 0.0001 par value;

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

61,052,250 and 50,345,755 shares issued at December 31, 2022 and December 31, 2021, respectively;

61,036,787 and 50,255,614 shares outstanding at December 31, 2022 and December 31, 2021, respectively

300,000,000 shares authorized;

96,787,343 and 61,052,250 shares issued at December 31, 2023 and 2022, respectively;

96,787,343 and 61,037,403 shares outstanding at December 31, 2023 and 2022, respectively

Additional paid-in capital 1,070,558 930,425

Accumulated other comprehensive loss ( 1,086 ) ( 255 )

Accumulated other comprehensive income (loss)

Accumulated deficit ( 981,904 ) ( 719,764 )

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Product revenue, net $ 29,186 $ 3,686 $ —

Other revenue

Total revenues 59,606 3,686 —

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Interest expense ( 29,712 ) ( 15,652 ) —

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

Loss before income taxes

( 259,027 ) ( 311,458 ) ( 206,356 )

Other comprehensive loss:

Unrealized loss on marketable securities ( 831 ) ( 253 ) ( 1 )

Provision for income taxes

$ ( 262,140 ) $ ( 311,458 ) $ ( 206,356 )

Other comprehensive income (loss):

Unrealized income (loss) on marketable securities 1,186 ( 831 ) ( 253 )

Foreign currency translation adjustment ( 96 ) — —

Total other comprehensive income (loss) 1,090 ( 831 ) ( 253 )

Comprehensive loss $ ( 261,050 ) $ ( 312,289 ) $ ( 206,609 )

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ARCUTIS BIOTHERAPEUTICS, INC.

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

Consolidated Statements of Changes in Stockholders’ Equity

(In thousands, except share data)

Preferred Stock Common Stock Additional

Common Stock Additional

Capital Accumulated Other Comprehensive Income (Loss) Accumulated

Deficit Total Stockholders’ Equity (Deficit)

Shares Amount Shares Amount

Deficit Total Stockholders’ Equity

Shares Amount

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

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

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

— — 10,781,250 1 167,240 — — 167,241

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

6,325,000 1 207,489 — — 207,490

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

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

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882,353 — 14,366 — — 14,366

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

8,625,000 1 161,656 — — 161,657

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

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

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

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

Issuance of common stock and pre-funded warrants, net of issuance costs of $ 6,546

33,425,000 3 95,762 — — 95,765

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

Issuance of common stock from ATM offering, net of issuance costs of $ 116

1,250,000 — 3,136 — — 3,136

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

Issuance of common stock upon the exercise of stock options 348,169 — 1,247 — — 1,247

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Unrealized loss on marketable securities — — — 1,186 — 1,186

Foreign currency translation adjustment — — — ( 96 ) — ( 96 )

Net loss — — — — ( 262,140 ) ( 262,140 )

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Stock-based compensation 38,813 32,682 23,892

Loss on disposal of property and equipment — — 42

Change in fair value of embedded derivative instrument

Changes in operating assets and liabilities:

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Milestone payment for intangible asset — ( 7,500 ) —

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

Net cash provided by (used in) investing activities

180,232 ( 87,199 ) ( 75,953 )

CASH FLOWS FROM FINANCING ACTIVITIES:

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Proceeds from issuance of shares under ATM, net of issuance costs 3,136 14,455 —

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

Proceeds from issuance of common stock and pre-funded warrants, net of issuance costs

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

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Net cash provided by financing activities 101,323 301,798 281,947

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

Effect of exchange rate changes on cash

Net increase (decrease) in cash, cash equivalents and restricted cash

34,448 ( 43,116 ) 31,367

Cash, cash equivalents and restricted cash at beginning of period 54,875 97,991 66,624

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

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

Right-of-use asset obtained in exchange for lease liability $ — $ — $ 3,617

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

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

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Organization and Description of Business

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

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

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 received U.S.

Food and Drug Administration (FDA) approval of its first product, ZORYVE ® (roflumilast) cream 0.3%, on July 29, 2022, for the treatment of individuals with plaque psoriasis, including intertriginous psoriasis, in individuals 12 years of age and older, and began commercialization in August 2022.

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

The Company believes it has built the industry's leading platform for dermatologic product development.

The Company’s strategy is to focus on validated biological targets and to use our drug development platform and deep dermatology expertise to develop differentiated products that have the potential to address the major shortcomings of existing therapies in its targeted indications.

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

Food and Drug Administration (FDA) approval of its first product, ZORYVE ® (roflumilast) cream 0.3% (ZORYVE cream), on July 29, 2022, for the treatment of plaque psoriasis, including intertriginous psoriasis, in individuals 12 years of age and older (subsequently approved down to 6 years old), and began U.S.

commercialization in August 2022.

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

The Company received FDA approval of ZORYVE ® (roflumilast) topical foam 0.3% (ZORYVE foam), on December 15, 2023, for the treatment of seborrheic dermatitis in individuals 9 years of age and older, and began U.S.

commercialization in late January 2024.

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.

Initial Public Offering and Follow-On Financings

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

The aggregate net proceeds received by the Company from the offering were approximately $ 167.2 million, after deducting underwriting discounts, commissions, and offering related transaction costs .

Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into shares of common stock.

Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.

On October 6, 2020, the Company completed a public offering of 4,000,000 shares of common stock at an offering price of $ 25.00 per share, receiving aggregate net proceeds of approximately $ 93.4 million after deducting the underwriting discounts, commissions, and offering related transaction costs.

In addition, the Company concurrently sold 1,400,000 shares of common stock in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, at a price per share equal to the public offering price, receiving net proceeds of $ 35.0 million.

On February 5, 2021, the Company completed a public offering of 6,325,000 shares of common stock at an offering price of $ 35.00 per share, including 825,000 shares sold pursuant to the underwriters full exercise of their option to purchase additional shares.

The aggregate net proceeds received by the Company were approximately $ 207.5 million, after deducting underwriting discounts, commissions, and offering related transaction costs.

On August 5, 2022, the Company completed a public offering of 8,625,000 shares of common stock at an offering price of $ 20.00 per share, including 1,125,000 shares sold pursuant to the underwriters full exercise of their option to purchase additional shares.

The aggregate net proceeds received by the Company were approximately $ 161.6 million, after deducting underwriting discounts, commissions, and offering related transaction costs.

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

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

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, and were not exercised as of December 31, 2023.

The aggregate net proceeds to the Company was $ 93.6 million after deducting underwriting discounts, commissions and estimated offering expenses payable by the Company.

The Company also 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 was exercised on November 7, 2023 for an additional 925,000 shares.

The aggregate net proceeds to the Company was $ 2.2 million after deducting underwriting discounts, commissions and estimated offering expenses payable by the Company.

At-the-Market (ATM) Offerings

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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.

In December 2023, the Company sold 1,250,000 shares under the ATM for $ 2.60 per share and received $ 3.1 million in net proceeds.

In January 2024, the Company amended and restated its Sales Agreement with Cowen and Company, LLC, or Cowen, to reset the shares available for sale, from time to time, through our ATM equity offering program to such number of shares as would generate aggregate gross sales proceeds of up to $ 100.0 million.

All terms are substantially the same as the original Sales Agreement entered into in May 2021.

The Company has not yet issued or sold any common stock under the amended and restated Sales Agreement.

ARCUTIS BIOTHERAPEUTICS, INC.

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The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 981.9 million and $ 719.8 million as of December 31, 2023 and 2022, respectively.

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

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

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

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

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

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

Management expects to continue to incur operating losses.

The Company believes that its existing capital resources will be sufficient to meet the projected operating requirements for at least 12 months from the date of issuance of its financial statements.

If the Company's available cash and marketable securities balances, amounts available under the Loan Agreement and anticipated future cash flows from operations are insufficient to satisfy its liquidity requirements, the Company may need to raise additional capital to fund its operations.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 272.8 million and $ 410.8 million as of December 31, 2023 and 2022, respectively.

The Company has $ 200.0 million outstanding under the Loan Agreement as of December 31, 2023.

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 minimum financing covenant requires that the Company raise $ 31.0 million by April 1, 2024.

To date, the Company has raised $ 5.3 million and has not complied with the minimum financing covenant.

If the Company does not comply with the covenant there would be an event of default under the Loan Agreement and the Company’s debt could be accelerated.

The Company intends to raise additional capital through (a) the sale or issuance of 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.

However, as the Company's ability to raise any such additional capital is based in part on factors that are outside of the Company's control, the Company cannot provide any assurance that we will be successful in raising such additional capital.

This uncertainty as to the Company's ability to comply with the minimum financing covenant indicates that there is substantial doubt about the Company's ability to continue as a going concern.

The financial statements do not include adjustments that might result from the outcome of this uncertainty.

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, so long as the Company's debt covenant is not accelerated.

If the Company's available cash and marketable securities, amounts available under the Loan Agreement and anticipated future cash flows from operations are insufficient to satisfy its liquidity requirements, the Company may need to raise additional capital to fund its operations.

No assurance can be given as to whether additional needed financing will be available on terms acceptable to the Company, if at all.

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Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives and have an adverse effect on its results of operations and future prospects.

Coronavirus Outbreak

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

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

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

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

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

Summary of Significant Accounting Policies

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

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

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

All material intercompany balances and transactions have been eliminated.

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Actual results could differ from those estimates.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

Accordingly, the Company has determined that it operates in one segment.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Cash and Cash Equivalents

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Restricted Cash

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

As of December 31, 2023 and 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

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

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

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

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

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

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

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

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

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

Trade Receivables, net

The Company’s trade accounts receivable consists of amounts due primarily from pharmaceutical wholesalers and specialty pharmacy providers in the United States (collectively, its "Customers") related to sales of ZORYVE and have standard payment terms.

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 cream 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.

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

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

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

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

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The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified.

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

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

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

Products which may be used in clinical development

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 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 consolidated statements of operations in the period incurred.

Intangible Assets, net

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

programs are excluded from inventory and their costs are charged to research and development expense in the consolidated statement of operations as incurred.

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

As of December 31, 2022, the Company had inventory, mostly at the raw materials stage, with a value of approximately $ 14.1 million which was previously expensed, which is expected to sell over the next two years.

As a result, cost of sales will reflect a lower average per unit cost of materials over this time period.

Intangible Assets, net

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

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

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

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

Amortization expense for the year ended December 31, 2022 was immaterial.

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

Amortization expense was $ 1.1 million and $ 0.3 million for the year ended December 31, 2023 and 2022, respectively.

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

Thereafter 2,688

Total amortization $ 6,438

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

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

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

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 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.

Concentration of Credit Risk and Other Risks and Uncertainties

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

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

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

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

Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Major customers are defined as customers that individually accounted for greater than 10% of the Company's revenue.

The following table presents each major customer that accounted for more than 10% of its gross product sales.

% of gross product sales

Total gross product sales from major customers

* Represents less than 10% of respective balance

The following table presents each major customer that accounted for more than 10% of its accounts receivable, net.

% of accounts receivable, net

Total accounts receivable, net from major customers

* Represents less than 10% of respective balance

Fair Value Measurement

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

The carrying amount of cash equivalents, accounts payable, and accrued liabilities approximate their fair values due to their short maturities.

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

The carrying amount of cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to their short maturities.

As the long-term debt is subject to variable interest rates that are based on market rates which regularly reset, the Company believes that the carrying value of the long-term debt approximates its fair value.

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

Fair value is defined as the exchange price that would be received for an asset or an exit price that would be paid to

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability.

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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 years ended December 31, 2022, 2021 or 2020.

There were no impairments recognized during the years ended December 31, 2023, 2022 and 2021.

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

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Notes to Consolidated Financial Statements

Nonclinical and Clinical Accruals and Costs

The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of nonclinical studies, clinical trials, and contract manufacturing activities.

Accrued and Prepaid Nonclinical and Clinical Costs

The Company records accrued liabilities for estimated costs and prepaid costs for research and development activities conducted by third-party service providers, which include the conduct of nonclinical studies, clinical trials, and contract manufacturing activities.

These costs are a significant component of the Company’s research and development expenses.

The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements.

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

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

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

For the years ended December 31, 2023, 2022 and 2021, the Company has not experienced any material differences between accrued costs and actual costs incurred.

Convertible Preferred Stock

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

In the event of such a deemed liquidation event, the proceeds from the event were to be distributed in accordance with the liquidation preferences, provided that the holders of convertible preferred stock had not converted their shares into common stock.

The Company recorded the issuance of convertible preferred stock at the issuance price less related issuance costs.

The Company did not adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty as to whether or when a deemed liquidation event may have occurred.

In connection with the IPO in February 2020, the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock.

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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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 30 - 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.

The reserves are classified as reductions to trade receivables, net if payable to a Customer or accrued liabilities if payable to a third-

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The reserves are classified as reductions to trade receivables, net if payable to a Customer or accrued liabilities if payable to a third-party.

Where appropriate, the Company utilizes the expected value method to determine the appropriate amount for estimates of variable consideration based on factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.

The amount of variable consideration that is included in the transaction price may be constrained and is included in net product revenues only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

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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Distribution Service Fees :

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

The Company pays the wholesalers a fee for services such as:

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

The Company pays the wholesalers and certain specialty pharmacies a fee for

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

services such as:

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

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Prompt Pay Discounts :

The Company provides its Customers with a percentage discount on their invoice if the Customers pay within the agreed upon timeframe.

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

The Company provides some of 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 revenue and accounts receivable at the time such revenue is recognized.

Product Returns :

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

Once sufficient history has been collected for product returns, the Company will utilize that history to inform our returns estimate.

Once sufficient history has been collected for product returns, the Company will utilize that history to inform its returns estimate.

Once the product is returned, it is destroyed.

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

The Company does not record a right-of-return asset.

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

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

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

Rebates and Discounts:

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

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

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

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

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

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

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE cream, 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.

The Company began capitalizing inventory costs upon FDA approval of ZORYVE on July 29, 2022.

As a result, manufacturing and other inventory costs incurred prior to FDA approval of ZORYVE were expensed and, therefore, are not included in cost of sales.

The Company began capitalizing inventory costs upon FDA approval of ZORYVE cream on July 29, 2022.

As a result, manufacturing and other inventory costs incurred prior to FDA approval of ZORYVE cream were expensed and, therefore, are not included in cost of sales.

Research and Development

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Such payments are evaluated for current or long-term classification based on when they will be realized.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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To date, none of the Company’s license agreements have been considered an acquisition of a business.

For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval that do not meet the definition of a derivative, are immediately recognized as research and development expense when paid or become payable, provided there is no alternative future use of the rights in other research and development projects.

For asset acquisitions contingent consideration is recognized when the contingency is resolved and the consideration is paid or becomes payable.

The upfront payments to acquire such licenses, as well as any future milestone payments made before product approval that do not meet the definition of a derivative, are immediately recognized as research and development expense when paid or become payable, provided there is no alternative future use of the rights in other research and development projects.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel, and costs related to sales and marketing of ZORYVE cream.

Other selling, general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for auditing, tax, and general legal services.

Advertising costs are expensed as incurred and were $ 11.2 million and $ 1.5 million for the years ended December 31, 2023 and 2022, respectively.

There were no advertising costs for the year ended December 31, 2021.

Pre-funded Warrants

Pursuant to the Company’s offering relating to the sale of securities completed in October 2023, the Company issued pre-funded 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 was $ 0.0001 per underlying share of common stock, were fully exercisable upon issuance, and have no expiration date.

The Company determined that the pre-funded warrants should be equity classified because they are freestanding financial instruments, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, permit the holders to receive a fixed number of shares of common stock upon exercise, are indexed to the Company’s common stock and meet the equity classification criteria.

In addition, such pre-funded warrants do not provide any guarantee of value or return.

Accordingly, the proceeds from the issuance of the warrants were recorded as additional paid-in capital on the Company’s consolidated balance sheet and included in weighted-average shares used in computing net loss per share as of December 31, 2023.

Stock-Based Compensation

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The Company accounts for forfeitures as they occur.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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

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 consolidated financial statements.

The Company currently does not consolidate any VIEs.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Income tax expense of $ 3.1 million for the year ended December 31, 2023 was primarily due to foreign withholding taxes on the up-front payment received in connection with the Huadong Agreement.

There was no income tax expense recognized for the year ended December 31, 2022 or 2021.

See Note 6 and Note 11.

Foreign Currency Translation

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

dollars using current exchange rates.

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

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

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

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock.

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, including prefunded warrants, without consideration for potential dilutive shares of common stock.

Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method.

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Shares of common stock subject to repurchase are excluded from the weighted-average shares.

Recently Adopted Accounting Pronouncements

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

Recently Issued Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07 , Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures , which requires public entities to disclose information about their reportable segments’ significant expenses and other segment items on an interim and annual basis.

Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280 on an interim and annual basis.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted.

The Company is currently evaluating the impact of adopting ASU 2023-07.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Fair Value Measurements

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Money market funds and U.S.

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$ 73,544 $ — $ — $ 73,544

Corporate debt securities

14,851 3 — 14,854

Total cash and cash equivalents $ 88,395 $ 3 $ — $ 88,398

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

December 31, 2022

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$ 53,641 $ — $ — $ 53,641

Corporate debt securities 1,304 — — 1,304

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

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Realized gains or losses on investments for the years ended December 31, 2023 and 2022 were no t material.

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

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

The following table summarizes the change in the fair value of the embedded derivative instrument for the year ended December 1, 2023 (in thousands).

There was no activity for the years ended December 31, 2022 or 2021.

Beginning balance

Loss from changes in fair value

Ending balance

The fair value of the Company’s embedded derivative instrument is based on significant inputs not observed in the market, and thus represents a Level 3 measurement.

Refer to Note 8 for further discussion on the embedded derivative instrument.

ARCUTIS BIOTHERAPEUTICS, INC.

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Prepaid co-pay assistance program $ 8,608 $ 3,226

Prepaid insurance 956 518

Prepaid clinical trial costs 1,024 172

Prepaid insurance 864 956

Other prepaid expenses and current assets 8,208 6,257

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Accrued compensation $ 14,872 $ 14,000

Clinical trial accruals 7,896 13,217

Accrued sales deductions 11,578 1,567

Clinical trial accruals 4,192 7,896

Accrued expenses and other current liabilities 3,299 4,860

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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 related to the Huadong agreement was $ 30.0 million and $ 3.0 million, respectively, for the year ended December 31, 2023.

AstraZeneca License Agreement

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

In July 2018, the Company entered into an exclusive license agreement, or the AstraZeneca License Agreement, with AstraZeneca AB (AstraZeneca), granting the Company a worldwide exclusive license, with the right to sublicense through multiple tiers, under certain AstraZeneca-controlled patent rights, know-how and regulatory documentation, to research, develop, manufacture, commercialize and otherwise exploit products containing roflumilast in topical forms, as well as delivery systems sold with or for the administration of roflumilast, or collectively, the AZ-Licensed Products, for all diagnostic, prophylactic and therapeutic uses for human dermatological indications, or the Dermatology Field.

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The Company paid AstraZeneca an upfront non-refundable cash payment of $ 1.0 million and issued 484,388 shares of Series B convertible preferred stock, valued at $ 3.0 million on the date of the AstraZeneca License Agreement, which were both recorded in research and development expense.

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

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

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

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

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

Amortization expense during the year ended December 31, 2022 was not material.

Amortization expense was $ 1.1 million and $ 0.3 million for the year ended December 31, 2023 and 2022, respectively.

The Company has agreed to make additional cash payments to AstraZeneca of up to an aggregate of $ 5.0 million upon the achievement of specified regulatory approval milestones with respect to the AZ-Licensed Products, and payments up to an additional aggregate amount of $ 15.0 million upon the achievement of certain aggregate worldwide net sales milestones, of which $ 5.0 million will become payable when the Company achieves $ 100.0 million in worldwide sales.

With respect to any AZ-Licensed Products the Company commercializes under the AstraZeneca License Agreement, it will pay AstraZeneca a low to high single-digit percentage royalty rate on the Company’s, its affiliates’ and its sublicensees’ net sales of such AZ-Licensed Products, subject to specified reductions, until, as determined on an AZ-Licensed Product-by-AZ-Licensed Product and country-by-country basis, the later of the date of the expiration of the last-to-expire AstraZeneca-licensed patent right containing a valid claim in such country and ten years from the first commercial sale of such AZ-Licensed Product in such country.

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

As a result of the commercialization of ZORYVE cream 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 year ended December 31, 2023 and 2022 was not material.

There were no milestone payments made or payable in connection with AZ-Licensed Products for the years ended December 31, 2023 and 2021.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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

Hengrui Exclusive Option and License Agreement

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

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

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

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

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

There were no payments made or due in connection with Hengrui for the years ended December 31, 2022, 2021, and 2020.

Hawkeye (lolyx Therapeutics) Collaboration Agreement

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

(Hawkeye), a related party with common ownership, for the development of one or more new applications of roflumilast.

The Hawkeye Agreement grants Hawkeye an exclusive license to certain intellectual property developed under the agreement as it relates to the applications.

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

In the event that Hawkeye issues shares of Series A convertible preferred stock with proceeds over $ 5.0 million, Hawkeye is required to issue to the Company a number of fully-paid fully-vested shares of common stock determined by dividing (i) $ 2,000,000 by (ii) an amount equal to the cash price per share for Series A convertible preferred stock.

Other than the potential issuance of this common stock, there are no upfront payments, milestones, or royalties pursuant to the Hawkeye Agreement.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

There were no payments made or due in connection with Hengrui for the year ended December 31, 2023, 2022 and 2021.

Ducentis Biotherapeutics LTD Acquisition

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

As of December 31, 2022, none of the milestones were probable of achievement and, accordingly, no amounts have been recognized in the accompanying consolidated financial statements with respect to these contingent payments.

There were no payments made or due in connection with the Ducentis acquisition for the year ended December 31, 2023.

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

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

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

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

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

The acquired IPR&D expense was not tax deductible.

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

Commitments and Contingencies

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Operating Lease

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

The Company leases a facility in Westlake Village, California under an operating lease that commenced in February 2019 and was amended in April 2020 in order to relocate to a new expanded space comprising 22,643 square feet, for which the Company recognized the ROU asset and lease liability for the new space on May 1, 2020.

The lease payment term for the new space began on December 30, 2020.

The lease payments terminate 91 months thereafter, with a renewal option for a term of five years .

The Company will have a one-time option to cancel the lease after month 67 .

The renewal and one-time cancellation options have not been considered in the determination of the ROU asset or lease liability as the Company did not consider it reasonably certain it would exercise these options.

The lease is subject to fixed rate escalation increases with an initial base rent of $ 76,000 per month, and includes rent free periods aggregating approximately one year .

As a result, the Company recognizes rent expense on a straight-line basis for the full amount of the commitment including the minimum rent increases over the life of the lease and the free rent period.

The amended lease agreement provided for a leasehold improvement allowance up to $ 1.25 million, which the Company fully utilized by incurring related costs.

This amount, along with $ 320,000 of additional costs incurred for leasehold improvements beyond the allowance, were capitalized and included in property and equipment as of December 31, 2020.

The lease payments terminate July 2028, with a renewal option for a term of five years .

The Company will have a one-time option to cancel the lease in July 2026.

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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Firm future purchase commitments under these agreements are approximately $ 1.9 million for 2024 and $ 0.8 million per year for 2025 and 2026.

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.

This amount does

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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.

Indemnification

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

License Agreements

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

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

Long-term debt

On December 22, 2021, the Company entered into a Loan Agreement with SLR and the lenders party thereto.

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).

As security for the obligations under the Loan Agreement, the Company granted SLR, for the benefit of the lenders, a continuing security interest in substantially all of the Company's assets, including its intellectual property, subject to certain exceptions.

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

The tranche A term loan under the Loan Agreement was funded on December 22, 2021 in the amount of $ 75.0 million.

With the approval of ZORYVE on July 29,2022, the tranche B term loans were funded and the Company received $ 125.0 million on August 2, 2022.

The tranche C term loan is available following the achievement of a net product revenue milestone of $ 110.0 million, calculated on a trailing six month basis.

The tranche C term loan will remain available for funding until September 30, 2024.

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 December 31, 2023.

Principal amounts outstanding under the Term Loans will accrue interest at a floating rate equal to the applicable rate in effect from time to time, as determined by SLR on the third business day prior to the funding date of the applicable Term Loan and on the first business day of the month prior to each payment date of each Term Loan.

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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.

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

On December 31, 2023, the rate was 12.90 %.

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Any principal amounts outstanding under the Term Loans, if not repaid sooner, are due and payable on January 1, 2027, or the Maturity Date.

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

If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, the Company is required to make mandatory prepayments of (i) all principal amounts outstanding under the Term Loans, plus accrued and unpaid interest thereon through the prepayment date, (ii) any fees applicable by reason of such prepayment, (iii) the prepayment premiums set forth in the paragraph above, plus (iv) all other

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

Loan so prepaid after December 22, 2022 and prior to December 22, 2023, or (iii) 1.0 % of the principal amount of such Term Loan so prepaid after December 22, 2023 and prior to December 22, 2025.

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

The Company has also agreed to a financial covenant whereby, beginning with the month ending December 31, 2023, the Company must generate net product revenue in excess of specified amounts for applicable measuring periods;

provided, however, that such financial covenant shall not apply if the Company’s average market capitalization over the trailing five day period prior to the last day of any measurement month is equal to or in excess of $ 400.0 million.

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

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

Under the Loan Agreement, an event of default will occur if, among other things, the Company fails to make payments under the Loan Agreement, the Company breaches any of our covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches, the lenders determine that a material adverse change has occurred, or the Company or the Company's assets become subject to certain legal proceedings, such as bankruptcy proceedings.

The Company 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 Agreement.

Under the Loan Agreement, an event of default will occur if, among other things, the Company fails to make payments under the Loan Agreement, the Company breaches any of the covenants under the Loan Agreement, subject to specified cure periods with respect to certain breaches, the lenders determine that a material adverse change has occurred, or the Company or the Company's assets become subject to certain legal proceedings, such as bankruptcy proceedings.

Upon the occurrence and for the duration of an event of default, an additional default interest rate, or the Default Rate, equal to 4.0 % per annum will apply to all obligations owed under the Loan Agreement.

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

At the inception of the Loan Agreement and through December 31, 2022, the fair value of the embedded derivative was determined to be immaterial and will be remeasured at fair value each reporting period with any future changes in fair value reported in earnings.

At the inception of the Loan Agreement, the fair value of the embedded derivative was determined to be immaterial.

The embedded derivative instrument is remeasured at fair value each reporting period with any future changes in fair value reported in Other income, net in the consolidated statement of operations and comprehensive loss.

The fair value of the embedded derivative instrument as of December 31, 2023 was a liability of $ 0.8 million and is included in Other-long term liabilities in the accompanying consolidated balance sheets.

I n connection with the Loan Agreement, the Company paid a closing fee of $ 1.0 million on December 22, 2021, and is further obligated to pay (i) a final fee equal to 6.95 % of the aggregate original principal amount of the Term Loans funded upon the earliest to occur of the Maturity Date, the acceleration of any Term Loan and the prepayment, refinancing, substitution, or replacement of any Term Loan and (ii) a certain amount of lenders’ expenses incurred in connection with the execution of the Loan Agreement.

Additionally, in connection with the Loan Agreement, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount 3.0 % of each Term Loan funded upon (i) any change of control transaction or (ii) a revenue milestone, calculated on a trailing six month basis.

Additionally, in connection with the Loan Agreement, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount of 3.0 % of each Term Loan funded upon (i) any change of control transaction or (ii) a revenue milestone, calculated on a trailing six month basis.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Pursuant to the amendment, the modified financial covenant requires the Company to generate a minimum net product revenue equal to 75 % of its 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.

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

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.

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

At December 31, 2023 and 2022, the effective interest rate was 14.81 % and 13.79 %, respectively.

Interest expense relating to the term loan was $ 29.7 million and $ 15.7 million for the year ended December 31, 2023 and 2022, respectively.

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

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

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

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Long-term debt, net $ 201,799 $ 197,769

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

Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

In connection with the Company's IPO in February 2020, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock.

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

Common stockholders are entitled to dividends when, as, and if declared by the board of directors.

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

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

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

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

Pre-funded warrants to purchase common stock

Equity awards plans:

Options issued and outstanding 7,919,699 7,476,223

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Total common stock reserved 22,329,657 12,837,138

Authorized Share Capital

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

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

Stock-Based Compensation

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

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

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

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

Accordingly, on January 1,

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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.

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, 2024, 2023 and 2022, the 2020 Plan reserve increased by 3,871,494 , 2,442,090 and 2,013,830 shares, respectively.

As of December 31, 2023, the Company had 1,894,860 shares available for future grant under the 2020 Plan.

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

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

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

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

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Stock Option Activity

The following summarizes option activity (in thousands, except share amounts):

The following summarizes option activity:

Options Weighted-

Value ($ in thousands)

Balance—December 31, 2022 7,476,223 $ 19.93 7.98 $ 18,667

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Balance—December 31, 2023 7,919,699 $ 18.52 7.35 $ 1,435

Exercisable—12/31/2022 (1)

Exercisable—December 31, 2023 (1)

4,673,892 $ 19.10 6.51 $ 1,236

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

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

The total grant-date fair value of the options vested during the year ended December 31, 2022 was $ 25.8 million.

The weighted-average grant-date fair value of employee options granted during the year ended December 31, 2022 was $ 14.08 .

The intrinsic value of options exercised for the years ended December 31, 2023, 2022, and 2021 were $ 1.2 million, $ 5.6 million and $ 5.8 million, respectively.

The total grant-date fair value of the options vested during the years ended December 31, 2023, 2022, and 2021 were $ 28.0 million, $ 25.8 million and $ 14.3 million, respectively.

The weighted-average grant-date fair value of employee options granted during the years ended December 31, 2023, 2022, and 2021 were $ 8.01 , $ 14.08 and $ 19.21 , respectively.

Restricted Stock Unit Activity

The following table summarizes information regarding our RSUs:

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

Number of Units Weighted-Average

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Unvested Balance—December 31, 2023 2,929,602 $ 15.24

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

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 .

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

Stock-Based Compensation Expense

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

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

Year Ended December 31,

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As of December 31, 2023, there was $ 37.2 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 2.2 years.

As of December 31, 2022, there was $ 25.6 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 3.1 years.

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

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

As of December 31, 2023, there was $ 34.2 million of total unrecognized compensation cost related to RSUs that are expected to vest, which is expected to be recognized over a weighted-average period of 2.8 years.

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

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

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

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

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

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

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

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

The Company uses the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term as it does not have sufficient prior exercise data to calculate based on historical data.

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

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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Dividend yield

Early Exercise of Employee Options

The terms of the 2017 and 2020 Plans permit certain option holders to exercise options before their options are vested, subject to certain limitations.

Upon early exercise, the awards become subject to a restricted stock agreement.

The shares of restricted stock granted upon early exercise of the options are subject to the same vesting provisions in the original stock option awards.

Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment, at the price paid by the purchaser.

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

Prior to September 30, 2022, the liability was reclassified into common stock and additional paid-in capital as the shares vested and the repurchase right lapsed.

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

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

No amounts were recorded as a liability as of December 31, 2022 as the amounts were immaterial.

2020 Employee Stock Purchase Plan

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Notes to Consolidated Financial Statements

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

The Company has incurred NOLs only in the United States since its inception.

The Company has not reflected any benefit of such NOL carryforwards in the financial statements.

Reconciliation of income tax computed at federal statutory rates to the reported provision for income taxes is as follows (in thousands):

The Company recorded an income tax expense of $ 3.1 million during the year ended December 31, 2023, Of the $ 3.1 million recorded, $ 3.0 million was related to foreign withholding taxes on the up-front fee in connection with the Huadong Agreement and $ 0.1 million was related to foreign tax expense.

The Company had no U.S.

federal income tax and state income tax expense for the years ended December 31, 2023, 2022 and 2021.

A reconciliation of loss before income taxes for domestic and foreign locations for the years ended December 31, 2023, 2022 and 2021 (in thousands):

Year Ended December 31,

2023 2022 2021

United States $ ( 255,653 ) $ ( 311,458 ) $ ( 206,356 )

Foreign ( 3,374 ) — —

Loss before income taxes

$ ( 259,027 ) $ ( 311,458 ) $ ( 206,356 )

A reconciliation of income tax expense for the years ended December 31, 2023, 2022 and 2021 is as follows (in thousands):

Year Ended December 31,

2023 2022 2021

Federal $ — $ — $ —

Foreign 3,113 — —

Total current income tax expense

Federal — — —

Foreign — — —

Total deferred income tax expense

Total income tax expense

$ 3,113 $ — $ —

A reconciliation of income tax computed at federal statutory rates to the reported provision for income taxes is as follows (in thousands):

Year Ended December 31,

2023 2022 2021

Tax provision at U.S.

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Uncertain tax positions

— 12,562 8,801

Permanent differences

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Ducentis IPR&D — 6,223 —

162(m) limitation 1,410 757 —

Non-deductible compensation

1,531 1,410 757

Withholding tax

Other 2,411 ( 372 ) ( 10 )

Provision for income tax

$ 3,113 $ — $ —

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

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Research and development tax credits 14,095 9,302

Section 174 R&E capitalization 34,646 —

Research and expenditure capitalization

32,812 34,646

Accruals and reserves 5,878 3,693

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The valuation allowance increased by approximately $ 53.4 million and $ 72.4 million during the years ended December 31, 2023 and 2022, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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

The Company has NOL carryforwards for federal and state income tax purposes of approximately $ 676.0 million and $ 523.3 million, respectively, as of December 31, 2023.

Of the federal NOLs, $ 3.5 million originated before the 2018 tax year and will expire beginning in 2036.

Under the Tax Cuts and Jobs Act of 2017, the remaining $ 467.7 million of NOLs generated after December 31, 2017 will be carried forward indefinitely.

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

Under the Tax Cuts and Jobs Act of 2017, the remaining $ 672.5 million of NOLs generated after December 31, 2017 will be carried forward indefinitely and will be available to offset 80% of taxable income in future years.

Of the $ 523.3 million in state net operating loss carryforwards, $ 481.8 million will begin to expire in 2027 and the remaining NOLs carry forward indefinitely.

In addition, the Company has foreign NOL carry forwards of approximately $ 4.0 million as of December 31, 2023, which can be carried forward indefinitely.

As of December 31, 2023, the Company also had federal and California research and development tax credit carryforwards of $ 19.8 million and $ 4.4 million, respectively.

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

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

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

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

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

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

The CAMT does not currently have an impact on the Company.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Uncertain Tax Benefits

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

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

Included in unrecognized tax benefits of $ 41.4 million at December 31, 2023 was $ 34.2 million of tax benefits that, if recognized, would reduce the annual effective tax rate, subject to valuation allowance.

The Company does not expect that there will be a significant change in the unrecognized tax benefits over the next 12 months.

The Company is subject to taxation in the United States and state jurisdictions where applicable.

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

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

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

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

The Company files tax returns in the United States, state jurisdictions, Canada, and the United Kingdom.

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

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

Due to net operating loss carryforwards and research and development credits in the United States and state tax jurisdictions, all years effectively remain open.

The Company is subject to examination by the tax authorities in Canada and the United Kingdom for the year ended December 31, 2022 to the present period.

It is the Company's practice to recognize interest and/or penalties related to income tax matters in income tax expense.

For the years ended December 31, 2023, 2022 and 2021, the Company has no t recognized any interest or penalties related to income taxes.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average common shares outstanding.

Pre-funded warrants to purchase 7,500,000 shares of the Company's stock were included in the weighted-average common shares outstanding used in calculating net loss per share for the year ended December 31, 2023.

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:

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Early exercised options subject to future vesting — 14,853 90,146

RSU's subject to future vesting 1,576,529 335,196 162,930

RSUs subject to future vesting

2,929,602 1,576,529 335,196

ESPP shares subject to future issuance 26,368 17,046 12,219

Total 10,875,669 9,084,651 6,195,518

Subsequent Event

On January 16, 2024, the Company commenced an offer to certain eligible employees and consultants to exchange certain outstanding eligible options to purchase shares of the Company’s common stock for a lesser

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Consolidated Financial Statements

number of RSUs pursuant to an option exchange program (the “Option Exchange”).

The Option Exchange expired on February 12, 2024.

Pursuant to the Option Exchange, eligible option holders elected to exchange, and the Company accepted for cancellation, eligible options to purchase an aggregate of 5,063,689 shares of the Company’s common stock, representing approximately 98 % of the total shares of common stock underlying the eligible options.

On February 12, 2024, immediately following the expiration of the Option Exchange, the Company granted 2,131,874 shares of Replacement RSU Awards, pursuant to the terms of the Option Exchange.

The Replacement RSU Awards will vest based on continued employment by or continued service as a consultant with the Company over a period of either 1 , 2 or 3 years, depending on the grant date of the exchanged options.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Todd Franklin Watanabe, Scott L.

Burrows and Mas Matsuda, his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Todd Franklin Watanabe, John W.

Smither and Mas Matsuda, his or her true and lawful attorney-in-fact and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the U.S.

Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or their, his or her substitutes or substitutes, may lawfully do or cause to be done by virtue hereof.

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Todd Franklin Watanabe

Burrows Chief Financial Officer

Chief Financial Officer

(Principal Accounting and Financial Officer) February 27, 2024

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/s/ Sue-Jean Lin Director February 27, 2024

/s/ Joseph Turner Director February 28, 2023

Joseph Turner

/s/ Howard G.

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

What changed 10-K

Item 9A. Controls and Procedures