Arcutis Biotherapeutics, Inc. 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2023, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such required information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Management Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based our assessment on the criteria set forth in "Internal Control - Integrated Framework (2013)" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of our assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2023. Changes in 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 Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 110 Table of Contents 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. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate. Item 9B. 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. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not applicable. Part III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 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. Item 11. EXECUTIVE COMPENSATION 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. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated by reference to our definitive proxy statement relating to our 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. Item 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this item is incorporated by reference to our definitive proxy statement relating to our 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. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 111 Table of Contents 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. 112 Table of Contents Index to Financial Statements Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Financial Statement Schedules. The following financial statements are included herein: Page Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations and Comprehensive Loss F-3 Consolidated Statements of Changes in Stockholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 113 Table of Contents Index to Financial Statements (b) Exhibits. Exhibit Number Description of Document Incorporated by Reference Form Date Number Filed/Furnished Herewith 3.1 Restated Certificate of Incorporation. 10-Q 5/12/20 3.1 3.2 Restated Bylaws. 10-Q 5/12/20 3.2 4.1 Form of Common Stock Certificate. S-1/A 1/21/20 4.1 4.2† Amended and Restated Investors’ Rights Agreement, dated October 8, 2019, by and among the Registrant and certain of its stockholders. S-1/A 1/21/20 4.2 4.3 Description of Arcutis Biotherapeutics’ Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934. 10-K 3/19/20 4.3 4.4 F orm of Pre-Funded Warrant 8-K 10/23/23 4.1 10.1# Form of Indemnity Agreement. S-1 1/6/20 10.1 10.2# 2017 Stock Incentive Plan and forms of award agreements. S-1 1/6/20 10.2 10.3# 2020 Stock Incentive Plan and forms of award agreements. S-1/A 1/21/20 10.3 10.4# 2020 Employee Stock Purchase Plan and forms of award agreements. S-1/A 1/21/20 10.4 10.5# 2022 Employment Inducement Incentive Plan and forms of award agreements. 10-K 2/22/22 10.5 10.6# Offer Letter, dated January 9, 2020, by and between the Registrant and Todd Franklin Watanabe. S-1/A 1/21/20 10.5 10.7# Consulting Agreement, dated August 16, 2016, by and between Bhaskar Chaudhuri and the Registrant. S-1 1/6/20 10.11 10.8†^ License Agreement, dated July 23, 2018, by and between AstraZeneca AB and the Registrant. S-1 1/6/20 10.12 10.9†^ Exclusive Option and License Agreement, dated January 4, 2018, by and between Jiangsu Hengrui Medicine Co., Ltd. and the Registrant. S-1 1/6/20 10.13 10.10†^ Collaboration Agreement, dated June 28, 2019, by and between Hawkeye Therapeutics, Inc. and the Registrant. S-1 1/6/20 10.14 10.11# Transition and Amendment Agreement, dated December 13, 2019 by and between Bhaskar Chaudhuri and the Registrant. S-1 1/6/20 10.15 10.12 Option Notice and Amendment No. 2 to Exclusive Option and License Agreement, dated December 5, 2019, by and between Jiangsu Hengrui Medicine Co., Ltd. and the Registrant. S-1 1/6/20 10.16 10.13# Severance & Change in Control Agreement, by and between the Registrant and Todd Franklin Watanabe. S-1/A 1/21/20 10.17 10.14 Offer Letter, dated December 18, 2020, by and between the Registrant and Matthew R. Moore. 10-K 2/16/21 10.23 10.15 Severance & Change in Control Agreement, by and between the Registrant and Matthew R. Moore. 10-K 2/16/21 10.24 10.16†^ Supply Agreement, dated November 24, 2020, by and between Registrant and Interquim, S.A. 10-K 2/16/21 10.25 10.17†^ Exclusive Distribution Agreement, dated February 8, 2021, by and between the Registrant and Cardinal Health 105, Inc. 10-Q 5/6/21 10.1 10.18†^ Amendment No. 1, dated October 5, 2022, to the Supply Agreement, dated November 24, 2020, by and among the Registrant and Interquim, S.A. 10-Q 11/8/22 10.2 10.19† Supply and Manufacturing Agreement, dated September 15, 2021, between DPT Laboratories, Ltd. and the Registrant. 10-Q 11/4/21 10.1 114 Table of Contents Index to Financial Statements 10.20 Offer Letter, dated December 13, 2021, by and between the Registrant and Mas Matsuda. 10-K 2/22/22 10.31 10.21 Severance & Change in Control Agreement, by and between the Registrant and Mas Matsuda. 10-K 2/22/22 10.32 10.22† Share Purchase Agreement, dated September 7, 2022, by and among the Registrant, Ducentis Biotherapeutics LTD and the certain stockholders of Ducentis Biotherapeutics LTD. 10-Q 11/8/22 10.1 10.23^ Amended and Restated Loan and Security Agreement, dated January 10, 2023, by and among the Registrant, SLR Investment Corp. and the lenders party thereto. 10-K 2/28/23 10.35 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-Q 11/3/23 10.2 10.25 Non-Employee Director Compensation Program 10-K 2/28/23 10.36 10.26 Form of Non-Employee Director RSU Deferral Election 10-K 2/28/23 10.37 10.27 License Agreement, dated August 10, 2023, by and between the Registrant and Hangzhou Zhongmei Huadong Pharmaceutical Co., Ltd . 10-Q 11/3/23 10.1 10.30 E mployment Agreement , dated September 1, 2023, by and between John Smither and the Registrant 8-K 9/7/23 10.1 10.31 S everance & C h a nge in Control Agreement, dated Septem ber 6, 2023, by and between John Smither and the Registrant 8-K 9/7/23 10.2 10.32 E mployment Agreement, dated as of Sep tember 16, 2023, by and between Todd Edwards and the Registrant 8-K 9/27/23 10.1 10.33 S everance and Change in Control Agreement, dated September 16, 2023, by and between Todd Edwards and the Registrant 8-K 9/27/23 10.2 10.34 A mended an d Restated Sales Agreement, dated January 31, 2024, by and between Registrant and Cowen and Company, LLC S-3 1/31/24 1.2 10.35 Ame ndment Employment Agreement , dated February 22, 2024, by and between the Regist rant and Matthew R. Moore 10-K 2/22/24 * 19 Insider Trading Policy and Procedures 10-K 5/31/23 * 23.1 Consent of Independent Registered Public Accounting Firm. * 24.1 Power of Attorney (included in the signature page to this Annual Report on Form 10-K). * 31.1 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ** 115 Table of Contents Index to Financial Statements 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. * 101.SCH Inline XBRL Taxonomy Extension Schema Document. * 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. * 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. * 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. * 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. * 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). * ______________ * Filed herewith. ** Furnished herewith. † Registrant has omitted portions of the exhibit as permitted under Item 601(b)(10) of Regulation S-K. ^ Registrant has omitted schedules and exhibits pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of the omitted schedules and exhibits to the SEC upon request. # Indicates management contract or compensatory plan. 116 Table of Contents Index to Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Arcutis Biotherapeutics, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Arcutis Biotherapeutics, Inc. (the Company) as of December 31, 2023 and 2022, 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, 2023 and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. F-1 Table of Contents Index to Financial Statements Sales deductions Description of the Matter 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. How We Addressed the Matter in Our Audit 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 We have served as the Company’s auditor since 2019. Los Angeles, California February 27, 2024 F-2 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Balance Sheets (In thousands, except share and par value) December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents $ 88,398 $ 53,641 Restricted cash 925 1,234 Marketable securities 183,463 355,948 Trade receivables, net 25,807 8,458 Inventory 13,134 7,514 Prepaid expenses and other current assets 18,704 10,611 Total current assets 330,431 437,406 Property and equipment, net 1,539 1,881 Intangible assets, net 6,438 7,188 Operating lease right-of-use asset 2,361 2,721 Other assets 596 78 Total assets $ 341,365 $ 449,274 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 11,992 $ 8,827 Accrued liabilities 33,941 28,323 Operating lease liability 735 657 Total current liabilities 46,668 37,807 Operating lease liability, noncurrent 3,382 4,117 Long-term debt, net 201,799 197,769 Other long-term liabilities 849 — Total liabilities 252,698 239,693 Commitments and contingencies (Note 7) Stockholders’ equity: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized; no shares issued and outstanding — — Common stock, $ 0.0001 par value; 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 9 6 Additional paid-in capital 1,070,558 930,425 Accumulated other comprehensive income (loss) 4 ( 1,086 ) Accumulated deficit ( 981,904 ) ( 719,764 ) Total stockholders’ equity 88,667 209,581 Total liabilities and stockholders’ equity $ 341,365 $ 449,274 The accompanying notes are an integral part of these consolidated financial statements. F-3 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) Year Ended December 31, 2023 2022 2021 Revenues: Product revenue, net $ 29,186 $ 3,686 $ — Other revenue 30,420 — — Total revenues 59,606 3,686 — Operating expenses: Cost of sales 4,987 754 — Research and development 110,575 182,435 145,558 Selling, general and administrative 185,145 122,124 60,971 Total operating expenses 300,707 305,313 206,529 Loss from operations ( 241,101 ) ( 301,627 ) ( 206,529 ) Other income (expense): Other income, net 11,786 5,821 173 Interest expense ( 29,712 ) ( 15,652 ) — Loss before income taxes ( 259,027 ) ( 311,458 ) ( 206,356 ) Provision for income taxes 3,113 — — Net loss $ ( 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 ) Per share information: Net loss per share, basic and diluted $ ( 3.78 ) $ ( 5.66 ) $ ( 4.18 ) Weighted-average shares used in computing net loss per share, basic and diluted 69,305,487 55,032,265 49,405,575 The accompanying notes are an integral part of these consolidated financial statements. F-4 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance—December 31, 2020 43,338,438 $ 4 $ 472,569 $ ( 2 ) $ ( 201,950 ) $ 270,621 Issuance of shares of common stock for public offering, net of issuance costs of $ 603 6,325,000 1 207,489 — — 207,490 Issuance of common stock upon the exercise of stock options 257,060 — 1,265 — — 1,265 Vesting of founder shares subject to repurchase 37,362 — — — — — Lapse of repurchase rights related to common stock issued pursuant to early exercises 249,239 — 176 — — 176 Shares issued pursuant to the ESPP 48,515 — 842 — — 842 Stock-based compensation expense — — 23,892 — — 23,892 Unrealized loss on marketable securities — — — ( 253 ) — ( 253 ) Net loss — — — — ( 206,356 ) ( 206,356 ) Balance—December 31, 2021 50,255,614 5 706,233 ( 255 ) ( 408,306 ) 297,677 Issuance of shares of common stock for public offering, net of issuance costs of $ 634 882,353 — 14,366 — — 14,366 Issuance of shares of common stock, net of discount and issuance costs of $ 10,844 8,625,000 1 161,656 — — 161,657 Issuance of shares of common stock related to the acquisition of Ducentis Biotherapeutics 610,258 — 12,468 — — 12,468 Issuance of common stock upon the exercise of stock options 331,890 — 1,016 — — 1,016 Issuance of common stock upon the vesting of restricted stock units 118,174 — — — — — Lapse of repurchasing rights related to common stock issued pursuant to early exercises 75,293 — 82 — — 82 Shares issued pursuant to the ESPP 138,821 — 1,922 — — 1,922 Stock-based compensation expense — — 32,682 — — 32,682 Unrealized loss on marketable securities — — — ( 831 ) — ( 831 ) Net loss — — — — ( 311,458 ) ( 311,458 ) Balance—December 31, 2022 61,037,403 6 930,425 ( 1,086 ) ( 719,764 ) 209,581 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 common stock from ATM offering, net of issuance costs of $ 116 1,250,000 — 3,136 — — 3,136 Issuance of common stock upon the exercise of stock options 348,169 — 1,247 — — 1,247 Issuance of common stock upon the vesting of restricted stock units 440,262 — — — — — Lapse of repurchasing rights related to common stock issued pursuant to early exercises 14,847 — — — — — Shares issued pursuant to the ESPP 271,662 — 1,175 — — 1,175 Stock-based compensation expense — — 38,813 — — 38,813 Unrealized loss on marketable securities — — — 1,186 — 1,186 Foreign currency translation adjustment — — — ( 96 ) — ( 96 ) Net loss — — — — ( 262,140 ) ( 262,140 ) Balance—December 31, 2023 96,787,343 $ 9 $ 1,070,558 $ 4 $ ( 981,904 ) $ 88,667 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents Index to Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2023 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 262,140 ) $ ( 311,458 ) $ ( 206,356 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 771 622 454 Non-cash lease expense 360 319 309 Amortization of intangible assets 750 312 — Acquired in-process research and development — 29,630 — Net amortization/accretion on marketable securities ( 6,989 ) ( 2,253 ) 3,454 Non-cash interest expense 4,030 2,606 — Stock-based compensation 38,813 32,682 23,892 Change in fair value of embedded derivative instrument 849 — — Changes in operating assets and liabilities: Accounts receivable, net ( 17,349 ) ( 8,458 ) — Inventories ( 5,620 ) ( 7,514 ) — Prepaid expenses and other current assets ( 8,621 ) 3,472 ( 7,329 ) Accounts payable 3,152 1,565 245 Accrued liabilities 5,594 1,193 10,461 Operating lease liabilities ( 657 ) ( 433 ) 243 Net cash used in operating activities ( 247,057 ) ( 257,715 ) ( 174,627 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ( 225,840 ) ( 415,389 ) ( 292,508 ) Proceeds from maturities of marketable securities 406,500 351,473 217,550 Purchases of property and equipment ( 428 ) ( 333 ) ( 995 ) Acquisition of in-process research and development — ( 15,450 ) — Milestone payment for intangible asset — ( 7,500 ) — Net cash provided by (used in) investing activities 180,232 ( 87,199 ) ( 75,953 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of stock options 1,247 1,016 1,265 Proceeds from issuance of shares under ATM, net of issuance costs 3,136 14,455 — Proceeds from issuance of common stock and pre-funded warrants, net of issuance costs 95,765 — — Proceeds from issuance of common stock, net of issuance costs — 161,592 207,490 Proceeds from issuance of common stock for ESPP 1,175 1,922 842 Proceeds from long-term debt — 125,000 73,987 Payment of debt issuance costs — ( 2,187 ) ( 1,637 ) Net cash provided by financing activities 101,323 301,798 281,947 Effect of exchange rate changes on cash ( 50 ) — — 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 Cash, cash equivalents and restricted cash at end of period $ 89,323 $ 54,875 $ 97,991 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: Interest expense paid in cash $ 25,445 $ 12,636 $ 142 Acquired in-process research and development in exchange for the issuance of common stock $ — $ 12,468 $ — The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 1. Organization and Description of Business Arcutis Biotherapeutics, Inc., or the Company, is 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% (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 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 On May 6, 2021, the Company entered into a sales agreement (Sales Agreement) with Cowen and Company, LLC (Cowen), under which the Company may from time to time issue and sell shares of its common stock through ATM offerings for an aggregate offering price of up to $ 100.0 million. Cowen will act as the Company's sales agent for the ATM program and is entitled to compensation for its services equal to 3 % of the gross proceeds of any shares of common stock sold under the Sales Agreement. In March, 2022, the Company sold 882,353 shares under the ATM for $ 17.00 per share and received $ 14.5 million in net proceeds. 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. F-7 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Liquidity The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 981.9 million and $ 719.8 million as of December 31, 2023 and 2022, respectively. Management expects to continue to incur operating losses. 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. See Note 8. 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. If sufficient funds on acceptable terms are not available when needed, the Company may be required to curtail certain planned activities. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives and have an adverse effect on its results of operations and future prospects. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The consolidated financial statements include the Company's wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates such estimates and assumptions for continued reasonableness. In particular, management makes estimates with respect to revenue recognition, accruals for research and development activities, stock-based compensation expense, and income taxes. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates. Segments To date, the Company has viewed its financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment. F-8 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Cash and Cash Equivalents The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of money market funds, commercial paper, U.S. Treasury securities, and short-term corporate debt securities. Restricted Cash As of December 31, 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. See Note 7. Marketable Securities Marketable securities consist of investment grade short to intermediate-term fixed income investments that have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in fixed income securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase, including those that have maturity dates beyond one year from the balance sheet date, are classified as current assets on the consolidated balance sheets due to their highly liquid nature and availability for use in current operations. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss) 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. To date, no such credit losses have occurred or have been recorded. The cost of investments sold is based on the specific-identification method. 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 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. The Company monitors the financial performance and creditworthiness of its Customers so that it can properly assess and respond to changes in their credit profile. The Company will reserve against trade accounts receivable for estimated credit losses that may arise and any amounts determined to be uncollectible will be written off against the reserve when it is probable that the receivable will not be collected. The reserve amount for estimated losses was not material as of December 31, 2023 and 2022. Inventory The Company values its inventories at the lower-of-cost or net realizable value. The Company determines the cost of its inventories, which includes costs related to products held for sale in the ordinary course of business, products in process of production for such sale, and items to be currently consumed in the production of goods to be available for sale, on a first-in, first-out (FIFO) basis. Due to the nature of the Company’s supply chain process, inventory that is owned by the Company is physically stored at third-party warehouses, logistics providers, and contract manufacturers. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, and writes down any excess and obsolete inventories to their net realizable value in the period in which the impairment is first identified. If they occur, such 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 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 F-9 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 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 was $ 1.1 million and $ 0.3 million for the year ended December 31, 2023 and 2022, respectively. See Note 6. Estimated future amortization expense for the intangible assets subsequent to December 31, 2023 is as follows (in thousands): Amounts 2024 $ 750 2025 750 2026 750 2027 750 2028 750 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. 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, 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 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. F-10 Table of Contents 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. December 31, % of gross product sales 2023 2022 Customer A 22 % 22 % Customer B 21 % 45 % Customer C 13 % 16 % Customer D 13 % * Customer E * 15 % Total gross product sales from major customers 69 % 98 % * 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. December 31, % of accounts receivable, net 2023 2022 Customer A 15 % 26 % Customer B 22 % 44 % Customer C 18 % 17 % Customer D 13 % * Customer E * 13 % Total accounts receivable, net from major customers 68 % 100 % * 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 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 transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The authoritative guidance on fair value measurements establishes a three-tier fair value hierarchy for disclosure of fair value measurements as follows: Level 1—Observable inputs such as unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; F-11 Table of Contents 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. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets which range from two to five years . Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms. Maintenance and repairs are expensed as incurred. The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairments recognized during the years ended December 31, 2023, 2022 and 2021. Leases The Company determines if an arrangement is or contains a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The classification of the Company’s leases as operating or finance leases, along with the initial measurement and recognition of the associated ROU assets and lease liabilities, is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate, based on the information available at commencement date, to determine the present value of lease payments when its leases do not provide an implicit rate. The Company uses the implicit rate when readily determinable. The ROU asset is based on the measurement of the lease liability, includes any lease payments made prior to or on lease commencement and is adjusted for lease incentives and initial direct costs incurred, as applicable. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company considers a lease term to be the non-cancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option. The Company’s lease agreements includes lease and non-lease components and the Company has elected to not separate such components for all classes of assets. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to leases with terms of 12 months or less (short-term leases) for all classes of assets. F-12 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 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 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. Revenues Pursuant to Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when a customer obtains control of promised goods or services. The Company records the amount of revenue that reflects the consideration that it expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that it transfers to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the contract to determine which performance obligations it must deliver and which of these performance obligations are distinct. The Company recognizes as revenue the amount of the transaction price that is allocated to each performance obligation when that performance obligation is satisfied or as it is satisfied. Product Revenue, Net The Company sells its product to its Customers in the United States 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 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. 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-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 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. If actual results vary from the Company’s estimates, the Company adjusts these estimates, which would affect net product revenue and earnings in the period such variances become known. Distribution Service Fees : The Company engages with wholesalers and specialty pharmacies to distribute its products to end customers. The Company pays the wholesalers and certain specialty pharmacies a fee for F-13 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements services such as: data reporting, inventory management, chargeback administration, and service level commitment. The Company estimates the amount of distribution services fees to be paid to the Customers and adjusts the transaction price with the amount of such estimate at the time of sale to the Customer. Prompt Pay Discounts : The Company provides 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 : The Company provides Customers a return credit in the amount of the purchase price paid by Customers for all products returned in accordance with the Company’s returned goods policy. In the initial sales period, the Company estimates its provision for sales returns based on industry data and adjusts the transaction price for such estimate at the time of sale to the Customer. Once sufficient history has been collected for product returns, the Company will utilize that history to inform 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. Chargeback : A chargeback is the difference between the manufacturer's invoice price to the wholesaler and the wholesaler’s customer's contract price. The wholesaler tracks these sales and "charges back" the manufacturer for the difference between the negotiated prices paid between the wholesaler's customers and wholesaler's acquisition cost. The Company estimates the percentage of goods sold that are eligible for chargeback and adjusts the transaction price for such discount at the time of sale to the Customer. Co-payment Assistance : Patients who meet certain eligibility requirements may receive co-payment assistance. The Company records contra-revenue 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. See Note 6. 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 F-14 Table of Contents 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 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 Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, license fees, stock-based compensation expense, materials, supplies, and the cost of services provided by outside contractors. All costs associated with research and development are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods are received or services are rendered. Such payments are evaluated for current or long-term classification based on when they will be realized. The Company has entered into, and may continue to enter into, license agreements to access and utilize certain technology. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date, none of the Company’s license agreements have been considered an acquisition of a business. For asset acquisitions 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. See Note 1. Stock-Based Compensation The Company accounts for share-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for such awards is the date of grant and the expense is recognized on a straight-line basis, over the expected vesting period. For share-based awards that vest subject to a performance condition, the Company will recognize compensation cost for awards if and when the Company concludes that it is probable that the awards with a performance condition will be achieved on an accelerated attribution method. The Company accounts for forfeitures as they occur. F-15 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Income Taxes Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance. The Company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based on the merits of the position. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties incurred in relation to the unrecognized tax benefits. 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, 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. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive. Shares of common stock subject to repurchase are excluded from the weighted-average shares. Recently 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. F-16 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 3. Fair Value Measurements The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): December 31, 2023 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 73,544 $ — $ — $ 73,544 Commercial paper — 11,806 — 11,806 Corporate debt securities — 59,954 — 59,954 U.S. Treasury securities 126,557 — — 126,557 Total assets $ 200,101 $ 71,760 $ — $ 271,861 December 31, 2022 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 53,641 $ — $ — $ 53,641 Commercial paper — 177,099 — 177,099 Corporate debt securities — 13,821 — 13,821 U.S. Treasury securities 165,028 — — 165,028 Total assets $ 218,669 $ 190,920 $ — $ 409,589 ______________ (1) This balance includes cash requirements settled on a nightly basis. Money market funds and U.S. Treasury securities are valued based on quoted market prices in active markets, with no valuation adjustment. Commercial paper and corporate debt securities are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. The following table summarizes the estimated value of the Company’s cash, cash equivalents and marketable securities, and the gross unrealized holding gains and losses (in thousands): December 31, 2023 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) $ 73,544 $ — $ — $ 73,544 Corporate debt securities 14,851 3 — 14,854 Total cash and cash equivalents $ 88,395 $ 3 $ — $ 88,398 Marketable securities: Commercial paper $ 11,817 1 ( 12 ) $ 11,806 Corporate debt securities 45,056 45 ( 1 ) 45,100 U.S. Treasury securities 126,492 82 ( 17 ) 126,557 Total marketable securities $ 183,365 $ 128 $ ( 30 ) $ 183,463 ______________ (1) This balance includes cash requirements settled on a nightly basis. F-17 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2022 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) $ 53,641 $ — $ — $ 53,641 Total cash and cash equivalents $ 53,641 $ — $ — $ 53,641 Marketable securities: Commercial paper $ 177,099 $ — $ — $ 177,099 Corporate debt securities 13,890 — ( 69 ) 13,821 U.S. Treasury securities 166,045 7 ( 1,024 ) 165,028 Total marketable securities $ 357,034 $ 7 $ ( 1,093 ) $ 355,948 ______________ (1) This balance includes cash requirements settled on a nightly basis. Realized gains or losses on investments for the years ended December 31, 2023 and 2022 were no t material. 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. December 31, 2023 Beginning balance $ — Loss from changes in fair value 849 Ending balance $ 849 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. F-18 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 4. Balance Sheet Components Inventories The components of inventory are summarized as follows (in thousands): December 31, 2023 2022 Raw materials $ 9,951 $ 5,659 Work in progress 486 395 Finished goods 2,697 1,460 Total inventories $ 13,134 $ 7,514 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): December 31, 2023 2022 Prepaid co-pay assistance program $ 8,608 $ 3,226 Prepaid clinical trial costs 1,024 172 Prepaid insurance 864 956 Other prepaid expenses and current assets 8,208 6,257 Total prepaid expenses and other current assets $ 18,704 $ 10,611 Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, 2023 2022 Accrued compensation $ 14,872 $ 14,000 Accrued sales deductions 11,578 1,567 Clinical trial accruals 4,192 7,896 Accrued expenses and other current liabilities 3,299 4,860 Total accrued liabilities $ 33,941 $ 28,323 F-19 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 5. Property and Equipment, net Property and equipment, net consists of the following (in thousands): December 31, 2023 2022 Computer hardware $ 1,130 $ 983 Furniture and fixtures 661 379 Software 104 104 Leasehold improvements 1,568 1,568 Property and equipment, gross 3,463 3,034 Less accumulated depreciation ( 1,924 ) ( 1,153 ) Property and equipment, net $ 1,539 $ 1,881 Depreciation expense was $ 0.8 million, $ 0.6 million, and $ 0.5 million for the years ended December 31, 2023, 2022, and 2021 respectively. Leasehold improvements are depreciated over the term of the lease, which is the shorter of the improvements' expected useful lives and the lease term. All other fixed asset depreciation is recorded using the straight-line method over the estimated useful lives of the assets ( two to five years ). 6. License Agreements & Acquisition 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 F-20 Table of Contents 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. Under this agreement, the Company has sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at its expense, and it shall use commercially reasonable efforts to develop, obtain and maintain regulatory approvals for, and commercialize the AZ-Licensed Products in the Dermatology Field in each of the United States, Italy, Spain, Germany, the United Kingdom, France, China, and Japan. The Company paid AstraZeneca an upfront non-refundable cash payment of $ 1.0 million and issued 484,388 shares of Series B convertible preferred stock, valued at $ 3.0 million on the date of the AstraZeneca License Agreement, which were both recorded in research and development expense. The Company subsequently paid AstraZeneca the first milestone cash payment of $ 2.0 million upon the completion of a Phase 2b study of 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 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 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. F-21 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Hengrui Exclusive Option and License Agreement In January 2018, the Company entered into an exclusive option and license agreement, or the Hengrui License Agreement, with Jiangsu Hengrui Medicine Co., Ltd. (Hengrui), whereby Hengrui granted the Company an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as 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. In December 2019, the Company exercised its exclusive option under the agreement, for which it made a $ 1.5 million cash payment, which was recorded in research and development expense, and also contemporaneously amended the agreement to expand the territory to additionally include Canada. In addition, the Company has agreed to make cash payments of up to an aggregate of $ 20.5 million upon achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $ 200.0 million in sales-based milestones based on certain aggregate annual net sales volumes with respect to a licensed product. With respect to any products the Company commercializes under the Hengrui License Agreement, it will pay tiered royalties to Hengrui on net sales of each licensed product by the Company, or its affiliates, or its sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions. The Company is obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis. Additionally, the Company is obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income it receives from sublicensees of its rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance. In June 2022, the Company entered into a side letter agreement with Hengrui and one of its subsidiaries to extend certain rights and obligations under the Hengrui License Agreement to the subsidiary under specified circumstances, including a change of control of such subsidiary. There were no payments made or due in connection with Hengrui for the year ended December 31, 2023, 2022 and 2021. Ducentis Biotherapeutics LTD Acquisition On September 7, 2022, the Company entered into a Share Purchase Agreement with Ducentis Biotherapeutics LTD (Ducentis), pursuant to which the Company acquired (the “Acquisition”) all of the outstanding equity interests in Ducentis for (i) 610,258 shares of the Company common stock valued at approximately $ 12.5 million and $ 15.9 million in cash, inclusive of liabilities acquired, and (ii) contingent payments, the amount of which is indeterminable until achieved, which may become payable upon the achievement of certain development, regulatory, and commercial milestones. The Company currently estimates that these contingent payments may be up to an aggregate of approximately $ 400 million (although the actual amount may differ depending on whether the applicable milestones are achieved). In addition, if applicable, the Company will make payments amounting to a mid-single-digit percentage of any annual net sales of Ducentis’s products exceeding $ 1.5 billion. 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 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. 7. Commitments and Contingencies F-22 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Operating Lease The Company leases a facility in Westlake Village, California under an operating lease that commenced in February 2019 and was amended in April 2020 in order to relocate to a new expanded space comprising 22,643 square feet, 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 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, 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): Amounts 2024 $ 994 2025 1,024 2026 1,054 2027 1,087 2028 653 Total minimum lease payments 4,812 Less: Amounts representing interest ( 695 ) Present value of future minimum lease payments $ 4,117 Current portion operating lease liability 735 Operating lease liability, noncurrent 3,382 Total operating lease liability $ 4,117 Straight-line rent expense recognized for operating leases was $ 737,000 , $ 716,000 , and $ 686,000 for the years ended December 31, 2023, 2022, and 2021, respectively. There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the years ended December 31, 2023, 2022, and 2021. The following information represents supplemental disclosure for the consolidated statements of cash flows related to the Company’s operating lease (in thousands): December 31, 2023 2022 2021 Cash flows from operating activities Cash paid for amounts included in the measurement of lease liabilities $ 965 $ 781 $ 114 The following summarizes additional information related to the operating lease: December 31, 2023 Weighted-average remaining lease term (in years) 4.8 Weighted-average discount rate 7.0 % Manufacturing Agreements The Company has entered into manufacturing supply agreements for the commercial supply of ZORYVE which include certain minimum purchase commitments. Firm future purchase commitments under these agreements are approximately $ 1.9 million for 2024 and $ 0.8 million per year for 2025 and 2026. This amount does F-23 Table of Contents 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 In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by the provisions of the Company's Bylaws and the Delaware General Corporation Law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes any potential loss exposure under these indemnification agreements in excess of applicable insurance coverage is minimal. 8. Long-term debt 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. 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 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 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. The applicable rate is a per annum interest rate equal to 7.45 % plus the greater of (a) 0.10 % and (b) the per annum rate published by the Intercontinental Exchange Benchmark Administration Ltd. (or on any successor or substitute published rate) for a term of one month, subject to a replacement with an alternate benchmark rate and spread in certain circumstances. 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 %. The maturity date for each term loan is January 1, 2027. Commencing on February 1, 2022, interest payments are payable monthly following the funding of any Term Loan. Any principal amounts outstanding under the Term Loans, if not repaid sooner, are due and payable on January 1, 2027, or the Maturity Date. The Company may voluntarily prepay principal amounts outstanding under the Term Loans in minimum increments of $ 5.0 million, subject to a prepayment premium of (i) 3.0 % of the principal amount of such Term Loan so prepaid prior to December 22, 2022, (ii) 2.0 % of the principal amount of such Term F-24 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Loan so prepaid after December 22, 2022 and prior to December 22, 2023, or (iii) 1.0 % of the principal amount of such Term Loan so prepaid after December 22, 2023 and prior to December 22, 2025. If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, the Company is required to make mandatory prepayments of (i) all principal amounts outstanding under the Term Loans, plus accrued and unpaid interest thereon through the prepayment date, (ii) any fees applicable by reason of such prepayment, (iii) the prepayment premiums set forth in the paragraph above, plus (iv) all other obligations that are due and payable, including expenses and interest at the Default Rate (as defined below) with respect to any past due amounts. 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 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. In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against the Company and the collateral securing the Term Loans. 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, 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. See Note 3. 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 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. F-25 Table of Contents 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. Interest expense is calculated using the effective interest method, and is inclusive of non-cash amortization of debt issuance costs. The final maturity payment of $ 13.7 million is recognized over the life of the term loan through interest expense. 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): December 31, 2023 2022 Long-term debt, gross $ 200,000 $ 200,000 Accrued final fee 4,876 1,871 Unamortized debt issuance costs ( 3,077 ) ( 4,102 ) Long-term debt, net $ 201,799 $ 197,769 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. 9. Stockholders’ Equity The Company reserved the following shares of common stock for issuance as follows: December 31, 2023 2022 Pre-funded warrants to purchase common stock 7,500,000 — Equity awards plans: Options issued and outstanding 7,919,699 7,476,223 Common stock awards available for grant under employee incentive plans 3,980,356 3,784,386 Restricted stock units outstanding 2,929,602 1,576,529 Total common stock reserved 22,329,657 12,837,138 10. Stock-Based Compensation In January 2020, the Company’s board of directors approved the 2020 Equity Incentive Plan (2020 Plan), which became effective January 30, 2020 in connection with the IPO. The 2020 Plan serves as the successor incentive award plan to the Company’s 2017 Equity Incentive Plan (2017 Plan) and initially reserved 2,134,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit (RSU) awards, and other stock-based awards, plus 1,550,150 shares of common stock that were reserved for issuance pursuant to F-26 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 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 the Company's 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, 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. The 2020 Plan provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors, and consultants of the Company under terms and provisions established by the board of directors. Under the terms of the 2020 Plan, options may be granted at an exercise price not less than fair market value. The Company generally grants stock-based awards with service conditions. Options granted typically vest over a four-year period but may be granted with different vesting terms. Following the Company’s IPO and in connection with the effectiveness of the Company’s 2020 Plan, the 2017 Plan terminated and no further awards will be granted under that plan. However, all outstanding awards under the 2017 Plan will continue to be governed by their existing terms. In December 2021, the Company’s board of directors approved the 2022 Employment Inducement Incentive Plan (2022 Plan). The 2022 Plan initially reserved 1,250,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, RSU awards, and other stock-based awards. In November 2022, the 2022 Plan reserve was increased by 1,500,000 . As of December 31, 2023, the Company had 676,925 shares available for future grant under the 2022 Plan. Stock Option Activity The following summarizes option activity: Number of Options Weighted- Average Exercise Price Remaining Contractual Term (Years) Aggregate Intrinsic Value ($ in thousands) Balance—December 31, 2022 7,476,223 $ 19.93 7.98 $ 18,667 Granted 1,792,110 11.59 Exercised ( 348,169 ) 3.58 Forfeited ( 691,161 ) 20.44 Expired ( 309,304 ) 24.88 Balance—December 31, 2023 7,919,699 $ 18.52 7.35 $ 1,435 Exercisable—December 31, 2023 (1) 4,673,892 $ 19.10 6.51 $ 1,236 ______________ (1) Options exercisable includes early exercisable options. The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of December 31, 2023. 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 F-27 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements The following table summarizes information regarding the Company's RSUs: Number of Units Weighted-Average Grant Date Fair Value Balance—December 31, 2022 1,576,529 $ 20.73 Granted 2,274,200 13.17 Vested ( 440,262 ) 21.20 Forfeited ( 480,865 ) 18.02 Unvested Balance—December 31, 2023 2,929,602 $ 15.24 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 . Stock-Based Compensation Expense Stock-based compensation expense included in the consolidated statements of operations and comprehensive loss was as follows (in thousands): Year Ended December 31, 2023 2022 2021 Research and development $ 15,544 $ 13,034 $ 8,478 Selling, general and administrative 23,269 19,648 15,414 Total stock-based compensation expense $ 38,813 $ 32,682 $ 23,892 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, 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. Each of these inputs is subjective and generally requires significant judgment. Fair value of common stock— The Company uses its closing stock price as reported on Nasdaq on the grant date for the fair value of its stock. Expected Term —The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company uses the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term 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. 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 . F-28 Table of Contents 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: Year Ended December 31, 2023 2022 2021 Expected term (in years) 5.0 – 6.1 5.4 – 6.1 5.5 – 6.2 Expected volatility 75.2 – 78.4 % 77.9 – 82.1 % 80.6 % – 85.2 % Risk-free interest rate 3.5 – 4.7 % 1.4 – 4.2 % 0.6 – 1.3 % Dividend yield — % — % — % 2020 Employee Stock Purchase Plan The Company adopted the 2020 Employee Stock Purchase Plan, or the ESPP, which became effective on January 30, 2020 in connection with the IPO. The ESPP is designed to allow the Company’s eligible employees to purchase shares of the Company’s common stock, at semi-annual intervals, with their accumulated payroll deductions. Under the ESPP, participants are offered the option to purchase shares of the Company’s common stock at a discount during a series of successive offering periods. The option purchase price will be the lower of 85 % of the closing trading price per share of the Company’s common stock on the first trading date of an offering period in which a participant is enrolled or 85 % of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period. The ESPP is intended to qualify under Section 423 of the U.S. Internal Revenue Service Code of 1986, as amended. The maximum number of the Company’s common stock which will be authorized for sale under the ESPP is equal to the sum of (a) 351,000 shares of common stock and (b) an annual increase on the first day of each year beginning in 2021 and ending in 2030, equal to the lesser of (i) 1 % of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the Company’s board of directors; provided, however, no more than 5,265,000 shares of the Company’s common stock may be issued under the ESPP. Accordingly, on January 1, 2024, 2023 and 2022, the ESPP reserve increased by 967,873 , 610,522 , and 503,457 shares, respectively. As of December 31, 2023, the Company had 1,408,571 shares available for future grant under the ESPP. Stock-based compensation expense related to the ESPP was $ 942,000 , $ 880,000 , and $ 442,000 for the years ended December 31, 2023, 2022 and 2021, respectively. F-29 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements 11. Income Taxes 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 Current: Federal $ — $ — $ — State — — — Foreign 3,113 — — Total current income tax expense 3,113 — — Deferred: Federal — — — State — — — 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. statutory rate $ ( 54,396 ) $ ( 65,406 ) $ ( 43,336 ) State income taxes, net of federal benefit ( 1,861 ) ( 12,260 ) ( 13,394 ) Research and development tax and other credits ( 4,834 ) ( 2,968 ) ( 2,497 ) Change in valuation allowance 53,715 72,149 44,675 Uncertain tax positions — — 12,562 Permanent differences 3,547 1,224 1,243 Ducentis IPR&D — 6,223 — Non-deductible compensation 1,531 1,410 757 Withholding tax 3,000 — — Other 2,411 ( 372 ) ( 10 ) Provision for income tax $ 3,113 $ — $ — F-30 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Significant components of the Company’s deferred income taxes were as follows (in thousands): December 31, 2023 2022 Deferred tax assets: Net operating loss carryforwards $ 152,276 $ 105,500 Intangibles 1,196 1,469 Research and development tax credits 14,095 9,302 Research and expenditure capitalization 32,812 34,646 Accruals and reserves 5,878 3,693 Right-of-use liability 957 1,221 Stock-based compensation 9,620 7,817 Gross deferred tax assets 216,834 163,648 Deferred tax liabilities: Property and equipment ( 120 ) ( 225 ) Right-of-use asset ( 549 ) ( 696 ) Gross deferred tax liabilities ( 669 ) ( 921 ) Net deferred tax assets 216,165 162,727 Less valuation allowance ( 216,165 ) ( 162,727 ) Total deferred tax assets $ — $ — Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Due to the lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $ 53.4 million and $ 72.4 million during the years ended December 31, 2023 and 2022, respectively. 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 $ 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. The federal research and development tax credit carryforwards will begin to expire in 2037. The California research and development tax credit carryforwards are available indefinitely. Federal and California tax laws impose significant restrictions on the utilization of NOL carryforwards in the event of a change in ownership of the Company, as defined by Internal Revenue Code Section 382 and 383. The Company believes it has had ownership changes in the past, and may have additional ownership changes in the future. These ownership changes could limit its ability to use all of its NOL carryforwards, credit carryforwards, or other tax attributes. The Inflation Reduction Act 2022 (IRA) which incorporates a Corporate Alternative Minimum Tax (CAMT) was signed on August 16, 2022. The changes 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. F-31 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Consolidated Financial Statements Uncertain Tax Benefits No liability related to uncertain tax positions is recorded on the financial statements. The following table summarizes the activity related to the unrecognized benefits (in thousands): Year Ended December 31, 2023 2022 2021 Beginning balance $ 42,505 $ 38,942 $ 20,274 Increases (decreases) related to tax positions taken during a prior year ( 3,097 ) 490 ( 6 ) Increases related to tax positions taken during the current year 1,982 3,073 18,674 Ending balance $ 41,390 $ 42,505 $ 38,942 The reversal of the uncertain tax benefits would not affect the effective tax rate to the extent that the Company continues to maintain a full valuation allowance against its deferred tax assets. The Company does not anticipate any significant changes to unrecognized tax benefits over the next 12 months. Included in unrecognized tax benefits of $ 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 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. 12. 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: As of December 31, 2023 2022 2021 Stock options to purchase common stock 7,919,699 7,476,223 5,757,957 Early exercised options subject to future vesting — 14,853 90,146 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 13. 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 F-32 Table of Contents 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. F-33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ARCUTIS BIOTHERAPEUTICS, INC. Date: February 27, 2024 By: /s/ Todd Franklin Watanabe Todd Franklin Watanabe President, Chief Executive Officer and Director (Principal Executive Officer) Date: February 27, 2024 By: /s/ John W. Smither John W. Smither Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Todd Franklin Watanabe, 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. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Signature Title Date /s/ Todd Franklin Watanabe President, Chief Executive Officer and Director (Principal Executive Officer) February 27, 2024 Todd Franklin Watanabe /s/ John W. Smither Chief Financial Officer (Principal Accounting and Financial Officer) February 27, 2024 John W. Smither /s/ Patrick J. Heron Director, Chairman February 27, 2024 Patrick J. Heron /s/ Bhaskar Chaudhuri Director February 27, 2024 Bhaskar Chaudhuri, Ph.D. /s/ Terrie Curran Director February 27, 2024 Terrie Curran /s/ Halley E. Gilbert Director February 27, 2024 Halley E. Gilbert /s/ Keith R. Leonard Director February 27, 2024 Keith R. Leonard /s/ Sue-Jean Lin Director February 27, 2024 Sue-Jean Lin /s/ Howard G. Welgus Director February 27, 2024 Howard G. Welgus, M.D. /s/ Neha Krishnamohan Director February 27, 2024 Neha Krishnamohan