What changed in this filing

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Item 1. Financial Statements

2024-11-06 compared with 2024-08-14 · 169 added, 134 removed, 443 unchanged (41% of the section changed)

3 unchanged sentences

(In thousands, except share and par value)

June 30, December 31,

September 30, December 31,

Current assets:

15 unchanged sentences

Accrued liabilities 52,790 33,941

Current portion of long-term debt, net

Operating lease liability 798 735

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Preferred stock, $ 0.0001 par value;

10,000,000 shares authorized at June 30, 2024 and December 31, 2023;

no shares issued and outstanding at June 30, 2024 and December 31, 2023

10,000,000 shares authorized;

no shares issued and outstanding

Common stock, $ 0.0001 par value;

300,000,000 shares authorized at June 30, 2024 and December 31, 2023;

116,480,267 and 96,787,343 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively

300,000,000 shares authorized;

116,998,829 and 96,787,343 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively

Additional paid-in capital 1,267,251 1,070,558

Accumulated other comprehensive loss ( 294 ) 4

Accumulated other comprehensive income

Accumulated deficit ( 1,111,155 ) ( 981,904 )

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(In thousands, except share and per share data)

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

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

2024 2023 2024 2023

17 unchanged sentences

Other comprehensive income (loss):

Unrealized income (loss) on marketable securities ( 127 ) 128 ( 243 ) 852

Unrealized gain on marketable securities

771 165 528 1,017

Foreign currency translation adjustment 56 ( 57 ) 1 ( 115 )

Total other comprehensive income (loss) ( 161 ) 122 ( 298 ) 794

Total other comprehensive income

827 108 529 902

Comprehensive loss $ ( 40,710 ) $ ( 44,657 ) $ ( 128,722 ) $ ( 194,954 )

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Balance—June 30, 2024 116,480,267 12 1,256,327 ( 294 ) ( 1,069,618 ) 186,427

Issuance of common stock upon the exercise of stock options 138,566 — 394 — — 394

Issuance of common stock upon the vesting of restricted stock units 379,996 — — — — —

Stock-based compensation expense — — 10,530 — — 10,530

Unrealized gain on marketable securities

— — — 771 — 771

Foreign currency translation adjustment — — — 56 — 56

Net loss — — — — ( 41,537 ) ( 41,537 )

Balance—September 30, 2024 116,998,829 $ 12 $ 1,267,251 $ 533 $ ( 1,111,155 ) $ 156,641

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

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

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

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

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

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

Unrealized gain on marketable securities — — — 165 — 165

Foreign currency translation adjustment — — — ( 57 ) — ( 57 )

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

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

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

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(In thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

21 unchanged sentences

Purchases of property and equipment ( 143 ) ( 422 )

Net cash provided by (used in) investing activities

Net cash (used in) provided by investing activities

( 6,057 ) 242,418

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Effect of exchange rate changes on cash ( 1 ) ( 118 )

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

Net increase in cash, cash equivalents, and restricted cash

46,145 53,521

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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:

Milestone for intangible asset not yet paid in cash

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest expense paid in cash $ 19,253 $ 18,862

13 unchanged sentences

commercialization in late July 2024.

The Company received Health Canada approval of ZORYVE foam in October 2024.

Initial Public Offering and Follow-On Financings

3 unchanged sentences

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 June 30, 2024.

The prefunded warrants are exercisable at any time on or after their original issuance, and were not exercised as of September 30, 2024.

On February 28, 2024, the Company completed an offering relating to the sale of 15,789,474 shares of the Company's common stock at $ 9.50 per share.

2 unchanged sentences

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 would 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, to reset the shares available for sale, from time to time, through the Company's 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.

On May 6, 2021, the Company entered into a sales agreement ("Sales Agreement") with Cowen and Company, LLC ("Cowen"), under which the Company could from time to time offer and sell shares of its common stock having an aggregate offering price of up to $ 100.0 million.

Cowen acts 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 ATM program.

In March 2022, the Company sold 882,353 shares under the ATM program 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 program 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 to reset the ATM program to provide for the offer and sale of shares of common stock having an aggregate gross offering price of up to $ 100.0 million.

All other terms of the amended and restated Sales Agreement are substantially the same as the original Sales Agreement.

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

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Notes to Condensed Consolidated Financial Statements

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 1,069.6 million and $ 981.9 million as of June 30, 2024 and December 31, 2023, respectively.

The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 1,111.2 million and $ 981.9 million as of September 30, 2024 and December 31, 2023, respectively.

Management expects to continue to incur operating losses.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 363.1 million and $ 272.8 million as of June 30, 2024 and December 31, 2023, respectively.

The Company has $ 200.0 million outstanding under the Loan Agreement as of June 30, 2024.

The Company had cash, cash equivalents, restricted cash, and marketable securities of $ 331.2 million and $ 272.8 million as of September 30, 2024 and December 31, 2023, respectively.

The Company had $ 200.0 million outstanding under the Loan Agreement as of September 30, 2024.

On October 8, 2024, the Company paid down $ 100 million of the principal under Loan Agreement with cash.

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

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

Failure to manage discretionary spending or raise additional funds, 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.

Summary of Significant Accounting Policies

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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.

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

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

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Unaudited Interim Condensed Consolidated Financial Statements

The interim condensed consolidated balance sheet as of June 30, 2024, the interim condensed consolidated statements of operations and comprehensive loss, and the condensed consolidated statements of changes in stockholders' equity and cash flows for the three and six months ended June 30, 2024 and 2023 are unaudited.

The interim condensed consolidated balance sheet as of September 30, 2024, the interim condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2024 and 2023, the condensed consolidated statements of changes in stockholders' equity as of September 30, 2024 and 2023, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2024 and 2023 are unaudited.

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

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

The condensed consolidated results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any other future annual or interim period.

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

The condensed consolidated results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the year ending December 31, 2024 or for any other future annual or interim period.

The condensed consolidated balance sheet as of December 31, 2023 included herein was derived from the audited financial statements as of that date.

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Therefore, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2023.

Significant Accounting Policies

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

There have been no significant changes to the accounting policies during the three and six months ended June 30, 2024, as compared to the significant accounting policies described in Note 2 of the Company’s audited financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2023.

Restricted Cash

As of June 30, 2024 and December 31, 2023, the Company held $ 0.6 million and $ 0.9 million, respectively, of restricted cash as collateral for a letter of credit related to the Company's amended office space lease.

As of September 30, 2024 and December 31, 2023, the Company held $ 0.6 million and $ 0.9 million, respectively, of restricted cash as collateral for a letter of credit related to the Company's amended office space lease.

Concentration of Credit Risk and Other Risks and Uncertainties

2 unchanged sentences

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

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

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

Fair Value Measurement

The Company’s financial instruments, in addition to those presented in Note 4, 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.

The carrying amount of 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.

7 unchanged sentences

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.

Co-promotion Agreement

I n July 2024, the Company entered into a co-promotion agreement with Kowa Pharmaceuticals America, Inc.

("Kowa") to leverage Kowa's primary care sales force to exclusively market and promote ZORYVE to primary care practitioners and pediatricians for all FDA-approved indications until July 2029.

The Company recognizes all revenue and Kowa receives a commission for the net sales attributed to Kowa, which is reflected in selling, general and administrative expense.

For the three and nine months ended September 30, 2024, revenue from sales attributed to Kowa were immaterial.

Recently Issued Accounting Pronouncements

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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.

ASU 2023-07 will be adopted by the Company in the Form 10-K for the year ended December 31, 2024.

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

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Revenues are recognized under guidance within ASC 606, Revenue from Contracts with Customers .

The following table presents the Company's disaggregated revenue for the periods presented (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2024 2023 2024 2023

2 unchanged sentences

20,262 — 40,405 —

ZORYVE cream 0.15%

2,452 — 2,452 —

Total product revenue, net

4 unchanged sentences

$ 44,755 $ 38,109 $ 125,182 $ 46,080

Other revenue relates to the Sato and Huadong licensing agreements.

Other revenue relates primarily to the Sato and Huadong licensing agreements.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Fair Value Measurements

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

June 30, 2024

September 30, 2024

Level 1 Level 2 Level 3 Total

1 unchanged sentence

$ 134,851 $ — $ — $ 134,851

Commercial paper — 4,931 — 4,931

Certificates of deposit

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Money market funds and U.S.

Treasury and agency securities are valued based on quoted market prices in active markets, with no valuation adjustment.

Treasury and agency securities are valued based on quoted market prices in active markets.

Commercial paper, certificates of deposit, and corporate debt securities are valued taking into consideration valuations obtained from third-party pricing services.

8 unchanged sentences

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

June 30, 2024

September 30, 2024

cost Unrealized

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Marketable securities:

Commercial paper $ 4,932 $ — $ ( 1 ) $ 4,931

Certificates of deposit

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

Realized gains or losses on investments for the three and six months ended June 30, 2024 and 2023 were no t material.

As of June 30, 2024, it was determined that no credit losses exist, because the change in market value of those securities resulted from fluctuations in market interest rates since the time of purchase, rather than a deterioration of the credit worthiness of the issuers.

As of June 30, 2024 and December 31, 2023, all securities have a maturity of 18 months or less and all securities with gross unrealized losses have been in a continuous loss position for less than one year.

Realized gains or losses on investments for the three and nine months ended September 30, 2024 and 2023 were no t material.

As of September 30, 2024, it was determined that no credit losses exist, because the change in market value of those securities resulted from fluctuations in market interest rates since the time of purchase, rather than a deterioration of the credit worthiness of the issuers.

As of September 30, 2024 and December 31, 2023, all securities have a maturity of 18 months or less and all securities with gross unrealized losses have been in a continuous loss position for less than one year.

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

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Notes to Condensed Consolidated Financial Statements

The following table summarizes the change in the fair value of the embedded derivative instrument for the six months ended June 30, 2024 (in thousands).

There was no activity for the six months ended June 30, 2023.

The following table summarizes the change in the fair value of the embedded derivative instrument for the nine months ended September 30, 2024 (in thousands).

There was no activity for the nine months ended September 30, 2023.

September 30,

Beginning balance

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

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Raw materials $ 4,089 $ 9,951

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

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Prepaid co-pay assistance program and rebates

$ 8,935 $ 8,608

Prepaid clinical trial costs 1,698 1,024

Prepaid insurance 739 864

Prepaid clinical trial costs — 1,024

Other prepaid expenses and current assets 8,734 8,208

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Accrued liabilities consist of the following (in thousands):

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Accrued sales deductions $ 30,029 $ 11,578

3 unchanged sentences

Total accrued liabilities $ 52,790 $ 33,941

License Agreements & Acquisition

License, Collaboration and Co-Promotion Agreements

Sato License Agreement

On February 27, 2024, the Company entered into a License Agreement with Sato Pharmaceutical Co., Ltd.

Pursuant to the terms of the License Agreement, the Company grants to Sato an exclusive, sublicensable (under certain circumstances) license under certain patent rights and know-how controlled by the Company for Sato

Pursuant to the terms of the License Agreement, the Company grants to Sato an exclusive, sublicensable

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

to develop, conduct medical affairs activities for, manufacture, commercialize, and otherwise exploit roflumilast formulations (the “Licensed Products”) for all therapeutic uses for certain dermatological indications in humans (the “Field”) in Japan (the "Territory").

(under certain circumstances) license under certain patent rights and know-how controlled by the Company for Sato to develop, conduct medical affairs activities for, manufacture, commercialize, and otherwise exploit roflumilast formulations (the “Licensed Products”) for all therapeutic uses for certain dermatological indications in humans (the “Field”) in Japan (the "Territory").

The License Agreement sets forth each party’s respective obligations with respect to the development, medical affairs activities, manufacture and supply, and commercialization of the Licensed Products.

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The Company may also terminate the License Agreement if Sato or any director, officers, employee, agent, affiliate, sublicensee, or subcontractor is charged by a governmental authority for a violation of any anti-corruption, anti-money laundering, sanctions or export or import control laws or regulations, or, subject to the terms of the License Agreement, if Sato, its affiliates and sublicensees do not conduct any material development or commercialization activities of a Licensed Product in Japan for a certain period of time.

Other revenue under the Sato agreement was $ 25.0 million for the three and six months ended June 30, 2024.

Other revenue under the Sato agreement was zero and $ 25.0 million for the three and nine months ended September 30, 2024, respectively.

Huadong License and Collaboration Agreement

6 unchanged sentences

In addition, the Company received a payment of $ 3.0 million in March 2024 related to the achievement of a development and regulatory milestone.

The Company may also potentially receive additional payments:

(i) up to an aggregate amount of $ 21.0 million upon the achievement of

The Company may also potentially

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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.

receive additional payments:

(i) up to an aggregate amount of $ 21.0 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:

1 unchanged sentence

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

For the three and six months ended June 30, 2024, the Company recognized zero and $ 3.0 million, respectively, of Other revenue and zero and $ 0.3 million, respectively, of income tax expense related to the achievement of a development and regulatory milestone.

No milestones were achieved for the three and six months ended June 30, 2023.

For the three and nine months ended September 30, 2024, the Company recognized zero and $ 3.0 million, respectively, of Other revenue and zero and $ 0.3 million, respectively, of income tax expense related to the achievement of a development and regulatory milestone.

For the three and nine months ended September 30, 2023, the Company recognized $ 30.0 million of Other revenue and $ 3.0 million of income tax expense related to the upfront fee pursuant to the agreement.

AstraZeneca License Agreement

4 unchanged sentences

In the third quarter of 2022, the Company paid $ 7.5 million to AstraZeneca as a result of the approval of ZORYVE cream 0.3%, which was recorded as an intangible asset.

In the third quarter of 2024, $ 5.0 million became payable by the Company to AstraZeneca upon achievement of $ 100.0 million in worldwide net sales, and was recorded as a cumulative catch-up adjustment to the carrying value of the 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 $ 0.2 million during the three months ended June 30, 2024 and 2023 and $ 0.4 million during the six months ended June 30, 2024 and 2023.

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.

Amortization expense was $ 1.2 million and $ 1.6 million during the three and nine months ended September 30, 2024, respectively, which includes a cumulative catch-up of the amortization expense related to the milestone achieved during the third quarter over its useful life from the date of first commercial sale.

Amortization expense was $ 0.2 million and $ 0.6 million during the three and nine months ended September 30, 2023, respectively.

The Company has agreed to make an additional cash payment to AstraZeneca of $ 5.0 million upon the achievement of a specified regulatory approval milestone with respect to the AZ-Licensed Products, and a payment of $ 10.0 million when the company achieves $ 250.0 million in worldwide net 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 from the first commercial sale of such AZ-Licensed Product in such country.

As a result of the commercialization of ZORYVE cream 0.3% in August 2022, the Company began accruing royalties payable to AstraZeneca, which are recorded in cost of sales and accrued liabilities.

Royalty expense was $ 0.9 million and $ 1.6 million during the three and six months ended June 30, 2024, respectively.

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

There were no milestone payments made or payable in connection with AZ-Licensed Products for the three and six months ended June 30, 2024 and 2023.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

expense was $ 1.4 million and $ 3.0 million during the three and nine months ended September 30, 2024, respectively.

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

For the three and nine months ended September 30, 2024, a $ 5.0 million milestone payment became payable by the Company to AstraZeneca upon achievement of $ 100.0 million in worldwide net sales, which was paid in October 2024.

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

Long-term Debt

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

On December 22, 2021, the Company entered into a loan and security agreement (the "Prior 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).

The Prior Loan Agreement was amended and restated on January 10, 2023 (the "AR Loan Agreement") to include Arcutis Canada, Inc.

as a borrower and party.

On November 1, 2023, the Company entered into an amendment to the AR Loan Agreement to, among others, (i) modify the financial covenant relating to minimum net product revenue, and (ii) include an additional minimum financing covenant.

On August 9, 2024, the Company entered into a second amendment to the AR Loan Agreement (the AR Loan Agreement, as amended by the first and second amendments, the "Loan Agreement"), which it determined be a modification, to, among others, (i) permit, during the period commencing on October 7, 2024 and ending on December 15, 2024, an optional partial prepayment of term loans outstanding, subject to a 1.0 % prepayment penalty (the “2024 Partial Prepayment”), (ii) add the tranche C-1 and tranche C-2 term loans, and (iii) facilitate certain other changes, including with respect to the applicable interest rate and maturity date in the event of a 2024 Partial Prepayment.

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 cream 0.3% 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.

The term loan facility is 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, (iv) a tranche C-1 term loan of up to $ 50.0 million, and (v) a tranche C-2 term loan of up to $ 50.0 million (collectively, the "Term Loans").

The tranche A term loan was funded on December 22, 2021.

With the approval of ZORYVE cream 0.3% on July 29, 2022, the tranche B term loans were funded on August 2, 2022.

As of each of December 31, 2023 and September 30, 2024, the aggregate principal amount outstanding under the Loan Agreement was $ 200.0 million.

On October 8, 2024, the Company made a 2024 Partial Prepayment of $ 100.0 million, which reduced the aggregate principal amount outstanding under the Loan Agreement to $ 100.0 million.

Since this payment was reasonably expected to be made as of September 30, 2024 and it would require the use of current assets, the Company reclassified $ 99.5 million, the payment net of the short-term portion of debt issuance costs, from long term liabilities to current liabilities as of September 30, 2024.

In connection with the 2024 Partial Prepayment, the Company is obligated to pay a prepayment penalty of $ 1.0 million by June 30, 2026 and a final fee of $ 6.95 million, representing the final fee applicable to the amount of the 2024 Partial Prepayment, on January 1, 2027.

As a result of such 2024 Partial Prepayment, subject to the Company generating a minimum net product revenue for the trailing six ( 6 ) month period ending as of the month prior to the borrowing date equal to 80 % of the Company’s projected net product revenue as set forth in its annual plan for the respective period, the Company will be able to draw down the tranche C-1 and tranche C-2 term loans.

The tranche C-1 term loan availability will expire on March 31, 2026 and the tranche C-2 term loan availability will expire on June 30, 2026.

In addition, as a result of the 2024 Partial Prepayment, (i) the maturity date of the Loan Agreement is August 1, 2029, (ii) the applicable per annum interest rate is equal to 5.95 % plus the greater of (a) 2.50 % per annum and (b) the one-month Secured Overnight Financing Rate ("SOFR"), (iii) the Company is no longer subject to certain cost and purchase price restrictions regarding acquisitions, and (iv) the Company may prepay principal amounts outstanding under the Term Loans in minimum increments of $ 25.0 million, subject to a prepayment premium of (a) 3.0 % for any prepayment made prior to the first anniversary of the second amendment, (b) 2.0 % for any prepayment made prior after the first anniversary of the second amendment and prior to the second anniversary of the second amendment, or (c) 1.0 % for any prepayment made prior after the second anniversary of the second amendment and prior to the maturity date.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

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 June 30, 2024, the rate was 12.88 %.

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

Prior to the 2024 Partial Prepayment, the applicable rate was a per annum interest rate equal to 7.45 % plus the greater of (a) 0.10 % and (b) the one-month SOFR.

On September 30, 2024, the rate was 11.12 %.

As a result of such 2024 Partial Prepayment, the applicable interest rate will be a per annum interest rate equal to 5.95 % plus the greater of (a) 2.50 % and (b) the one-month SOFR.

The benchmark SOFR is subject to change in the event of certain events with respect to the benchmark rate.

Interest payments are payable monthly following the funding of any Term Loan.

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.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

The Company also agreed to a financial covenant whereby the Company must 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 six-month basis, as of the end of each month.

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.

The Company was in compliance with all covenants under the Loan Agreement as of September 30, 2024.

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.

4 unchanged sentences

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 condensed consolidated statement of operations and comprehensive loss.

During the three and six months ended June 30, 2024, the Company recognized a $ 0.1 million and $ 0.7 million gain, respectively, in Other income, net related to the change in fair value of the embedded derivative instrument.

The fair value of the embedded derivative instrument as of June 30, 2024 and December 31, 2023 was a liability of $ 0.2 million and $ 0.8 million, respectively, and is included in Other long-term liabilities in the accompanying condensed consolidated balance sheets.

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

Additionally, in connection with the Loan Agreement, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount 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.

During the three and nine months ended September 30, 2024, the Company recognized a $ 0.2 million loss and $ 0.4 million gain in Other income, net, respectively, related to the change in fair value of the embedded derivative instrument.

The fair value of the embedded derivative instrument as of September 30, 2024 and December 31, 2023 was a liability of $ 0.4 million and $ 0.8 million, respectively, and is included in Other long-term liabilities in the accompanying condensed consolidated balance sheets.

I n connection with the Loan Agreement, the Company is obligated to pay (i) a final fee equal to 6.95 % of the aggregate original principal amount of the Term Loans outstanding as of the date of the second amendment (x) with respect to any 2024 Partial Prepayment, upon the earliest to occur of (a) January 1, 2027, (b) the acceleration of all outstanding Term Loans and (c) the prepayment, or refinancing, substitution or replacement of all outstanding Term Loans, and (y) with respect to the Term Loans outstanding as of the date of the second amendment (other than the 2024 Partial Prepayment), upon the earliest to occur of (a) the maturity date, (b) the acceleration of all outstanding Term Loans and (c) the prepayment, or refinancing, substitution or replacement of all outstanding Term Loans, (ii) a

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

2.00 % fee with respect to tranche C term loans, due and payable on the earliest to occur of (a) the maturity date, (b) the acceleration of all outstanding Term Loans and (c) the prepayment, or refinancing, substitution or replacement of all outstanding Term Loans, (iii) a 2.00 % extension fee with respect to tranche C term loans which remain unfunded after December 31, 2025, which shall accrue during the period commencing January 1, 2026, and ending on the earliest to occur of (a) the expiration of the tranche C term loan availability, and (b) the date on which tranche C term loan is fully drawn, and (iv) a certain amount of lenders’ expenses incurred in connection with the execution of the Loan Agreement.

Additionally, in connection with the original Prior Loan Agreement, the Company previously had 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.

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.

The Company raised the required capital during the first quarter of 2024 and was in compliance with all financing covenants under the Loan Agreement as of June 30, 2024.

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

1 unchanged sentence

The final maturity payment of $ 13.9 million is recognized over the life of the term loan through interest expense.

At June 30, 2024 and December 31, 2023, the effective interest rate was 14.79 % and 14.81 %, respectively.

Interest expense relating to the term loan for the three and six months ended June 30, 2024 was $ 7.5 million and $ 15.0 million, respectively, and $ 7.4 million and $ 14.4 million for three and six months ended June 30, 2023.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

At September 30, 2024 and December 31, 2023, the effective interest rate was 12.40 % and 14.81 %, respectively.

Interest expense relating to the term loan for the three and nine months ended September 30, 2024 was $ 6.6 million and $ 21.6 million, respectively, and $ 7.6 million and $ 22.0 million for three and nine months ended September 30, 2023.

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

June 30, 2024 December 31, 2023

September 30, 2024 December 31, 2023

Long-term debt, gross

2 unchanged sentences

Unamortized debt issuance costs ( 2,362 ) ( 3,077 )

Long-term debt, net $ 203,808 $ 201,799

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.

In July 2024, the Company entered into an additional amendment to the Loan Agreement which substantially changed the terms discussed above, See Note 10.

Total carrying value of debt

204,608 201,799

Less current portion

Total long-term debt, net

$ 105,095 $ 201,799

Based on the Company's long-term debt outstanding at September 30, 2024, a payment of principal and final fees of $ 213.9 million would be due on January 1, 2027, the contractual maturity of the long-term debt as of September 30, 2024.

This amount decreased and the contractual maturity date was extended following the 2024 Partial Prepayment in October 2024.

Stock-Based Compensation

Stock Option Exchange Program

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

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 number of restricted stock unit ("RSU") awards pursuant to an option exchange program (the “Option Exchange”).

The Option Exchange expired on February 12, 2024.

2 unchanged sentences

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

The exchange of stock options was treated as a modification for accounting purposes, which requires an incremental expense of $ 8.6 million to be recognized for the Replacement RSU Awards over their new service periods ( 1 - 3 years).

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

periods ( 1 - 3 years).

In addition, any unamortized expense remaining on the exchanged options as of the modification will be recognized over their original remaining service period.

8 unchanged sentences

Expired ( 308,725 ) 24.44

Balance—June 30, 2024 5,872,080 $ 6.32 8.28 $ 25,327

Exercisable—June 30, 2024

Balance—September 30, 2024 5,634,494 $ 6.51 8.04 $ 23,561

Exercisable—September 30, 2024

2,120,880 $ 8.16 6.14 $ 8,715

1 unchanged sentence

(1) The number of stock options forfeited includes those exchanged in the Option Exchange as described above.

The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of June 30, 2024.

The intrinsic value of options exercised for the six months ended June 30, 2024 and 2023 was $ 0.8 million and $ 0.7 million, respectively.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

The total grant-date fair value of the options vested during the six months ended June 30, 2024 and 2023 was $ 2.2 million and $ 14.9 million, respectively.

The weighted-average grant-date fair value of employee options granted during the six months ended June 30, 2024 and 2023 was $ 3.59 and $ 10.25 , respectively.

The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of September 30, 2024.

The intrinsic value of options exercised for the nine months ended September 30, 2024 and 2023 was $ 1.7 million and $ 1.2 million, respectively.

The total grant-date fair value of the options vested during the nine months ended September 30, 2024 and 2023 was $ 3.1 million and $ 22.1 million, respectively.

The weighted-average grant-date fair value of employee options granted during the nine months ended September 30, 2024 and 2023 was $ 3.64 and $ 8.76 , respectively.

Restricted Stock Unit Activity

6 unchanged sentences

Forfeited ( 839,143 ) 8.67

Unvested Balance—June 30, 2024 6,679,040 $ 7.65

Unvested Balance—September 30, 2024 6,487,840 $ 7.83

______________

2 unchanged sentences

RSUs generally vest equally over four years , except those issued in connection with the Option Exchange as described above.

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Stock-Based Compensation Expense

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

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

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

2024 2023 2024 2023

4 unchanged sentences

$ 10,241 $ 9,999 $ 32,337 $ 30,056

As of June 30, 2024, there was $ 33.7 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 2.3 years.

As of June 30, 2024, there was $ 42.5 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 2.6 years.

As of September 30, 2024, there was $ 28.7 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 September 30, 2024, there was $ 40.4 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 2.5 years.

In April 2024, in connection with the retirement of the former Chief Financial Officer, the Company modified the terms of this individual's historical stock awards.

As a result of the modifications, the Company recognized $ 1.7 million of incremental stock compensation expense during the period, which is included in selling, general and administrative expenses.

As a result of the modifications, the Company recognized $ 1.7 million of incremental stock compensation expense during the nine months ended September 30, 2024, which is included in selling, general and administrative expenses.

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

Six Months Ended June 30, 2024 Year Ended

Nine Months Ended September 30, 2024 Year Ended

December 31, 2023

5 unchanged sentences

Dividend yield

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Net Loss Per Share

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

Pre-funded warrants to purchase 7,500,000 shares of the Company's stock were included in the weighted-average common shares outstanding used in calculating net loss per share for the three and six months ended June 30, 2024.

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

As of June 30,

As of September 30,

Stock options to purchase common stock 5,634,494 8,228,270

3 unchanged sentences

Total 12,238,260 11,229,576

ARCUTIS BIOTHERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

Subsequent Events

I n July 2024, the Company entered into a co-promotion agreement with Kowa Pharmaceuticals America, Inc.

("Kowa") to leverage Kowa's primary care sales force to exclusively market and promote ZORYVE cream and ZORYVE foam to primary care practitioners and pediatricians for all FDA-approved indications until July 2029.

Under the terms of the agreement, Arcutis will recognize all revenue and Kowa will receive a commission from sales attributed to Kowa.

In August 2024, the Company amended its Loan Agreement with SLR which substantially changed the terms, including (i) allowance for a one-time partial prepayment of existing term loans after October 7, 2024, and on or before December 15, 2024, with a 1.0 % prepayment premium (the "2024 Partial Prepayment");

(ii) upon making the 2024 Partial Prepayment, an additional tranche C-1 term loan of up to $ 50.0 million (expiring March 31, 2026) and an additional tranche C-2 term loan of up to $ 50.0 million (expiring on June 30, 2026) will become available, subject to the Company generating a minimum net product revenue equal to 80 % of its projected net product revenue as set forth in our annual plan for the respective period (iii) extension of the maturity date to August 1, 2029, or January 1, 2027 if the 2024 Partial Prepayment is not made;

(iv) if the 2024 Partial Prepayment is made, the applicable per annum interest rate will be equal to 5.95 % plus the greater of (a) 2.50 % per annum and (b) SOFR;

(v) permission for us to prepay the full loan amount prior to the maturity date with a prepayment penalty of up to 3.0 %;

and (vi) removal of the cap on acquisition costs.

On October 8, 2024, the Company made a 2024 Partial Prepayment of $ 100.0 million under the Loan Agreement.

After the 2024 Partial Prepayment, based on the Company's long-term debt outstanding immediately following the 2024 Partial Prepayment, a payment of principal and final fees of $ 106.95 million would be due on August 1, 2029, the contractual maturity of the long-term debt following the 2024 Partial Prepayment.

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

What changed 10-Q

Item 1. Financial Statements