Arcutis Biotherapeutics, Inc. 10-Q

Item 1. Financial Statements ARCUTIS BIOTHERAPEUTICS, INC. Condensed Consolidated Balance Sheets (In thousands, except share and par value) September 30, December 31, 2024 2023 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 134,851 $ 88,398 Restricted cash 617 925 Marketable securities 195,710 183,463 Trade receivables, net 60,119 25,807 Inventories 14,015 13,134 Prepaid expenses and other current assets 18,408 18,704 Total current assets 423,720 330,431 Property, plant, and equipment, net 1,186 1,539 Intangible assets, net 9,792 6,438 Operating lease right-of-use asset 2,060 2,361 Other assets 596 596 Total assets $ 437,354 $ 341,365 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 19,325 $ 11,992 Accrued liabilities 52,790 33,941 Current portion of long-term debt, net 99,513 — Operating lease liability 798 735 Total current liabilities 172,426 46,668 Operating lease liability, noncurrent 2,772 3,382 Long-term debt, net 105,095 201,799 Other long-term liabilities 420 849 Total liabilities 280,713 252,698 Commitments and contingencies 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; 116,998,829 and 96,787,343 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively 12 9 Additional paid-in capital 1,267,251 1,070,558 Accumulated other comprehensive income 533 4 Accumulated deficit ( 1,111,155 ) ( 981,904 ) Total stockholders’ equity 156,641 88,667 Total liabilities and stockholders’ equity $ 437,354 $ 341,365 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 1 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Condensed Consolidated Statements of Operations and Comprehensive Loss (In thousands, except share and per share data) (unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenues: Product revenue, net $ 44,755 $ 8,109 $ 97,182 $ 15,660 Other revenue — 30,000 28,000 30,420 Total revenues 44,755 38,109 125,182 46,080 Operating expenses: Cost of sales 5,503 1,182 12,223 2,741 Research and development 19,501 26,236 61,940 86,800 Selling, general, and administrative 58,817 47,595 171,784 136,471 Total operating expenses 83,821 75,013 245,947 226,012 Loss from operations ( 39,066 ) ( 36,904 ) ( 120,765 ) ( 179,932 ) Other income (expense): Other income, net 4,182 2,721 13,455 9,114 Interest expense ( 6,653 ) ( 7,559 ) ( 21,617 ) ( 21,950 ) Loss before income taxes ( 41,537 ) ( 41,742 ) ( 128,927 ) ( 192,768 ) Provision for income taxes — 3,023 324 3,088 Net loss $ ( 41,537 ) $ ( 44,765 ) $ ( 129,251 ) $ ( 195,856 ) Other comprehensive income (loss): Unrealized gain on marketable securities 771 165 528 1,017 Foreign currency translation adjustment 56 ( 57 ) 1 ( 115 ) Total other comprehensive income 827 108 529 902 Comprehensive loss $ ( 40,710 ) $ ( 44,657 ) $ ( 128,722 ) $ ( 194,954 ) Per share information: Net loss per share, basic and diluted $ ( 0.33 ) $ ( 0.73 ) $ ( 1.08 ) $ ( 3.19 ) Weighted-average shares used in computing net loss per share, basic and diluted 124,302,317 61,727,278 119,627,687 61,462,025 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 2 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance—December 31, 2023 96,787,349 $ 9 $ 1,070,558 $ 4 $ ( 981,904 ) $ 88,667 Issuance of shares of common stock net of discount and issuance costs of $ 10,820 18,157,895 3 161,679 — — 161,682 Issuance of common stock upon the exercise of stock options 21,863 — 82 — — 82 Issuance of common stock upon the vesting of restricted stock units 538,330 — — — — — Stock-based compensation expense — — 10,030 — — 10,030 Unrealized loss on marketable securities — — — ( 116 ) — ( 116 ) Foreign currency translation adjustment — — — ( 21 ) — ( 21 ) Net loss — — — — ( 35,382 ) ( 35,382 ) Balance—March 31, 2024 115,505,437 12 1,242,349 ( 133 ) ( 1,017,286 ) 224,942 Issuance of common stock upon the exercise of stock options 147,490 — 806 — — 806 Issuance of common stock upon the vesting of restricted stock units 443,365 — — — — — Shares issued pursuant to the employee stock purchase plan 383,975 — 649 — — 649 Stock-based compensation expense — — 12,523 — — 12,523 Unrealized loss on marketable securities — — — ( 127 ) — ( 127 ) Foreign currency translation adjustment — — — ( 34 ) — ( 34 ) Net loss — — — — ( 52,332 ) ( 52,332 ) 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. 3 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Condensed Consolidated Statements of Changes in Stockholders’ Equity (In thousands, except share data) (unaudited) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Balance—December 31, 2022 61,037,403 $ 6 $ 930,425 $ ( 1,086 ) $ ( 719,764 ) $ 209,581 Issuance of common stock upon the exercise of stock options 31,497 — 100 — — 100 Issuance of common stock upon the vesting of restricted stock units 285,314 — — — — — Lapse of repurchase rights related to common stock issued pursuant to early exercises 3,718 — — — — — Stock-based compensation expense — — 9,479 — — 9,479 Unrealized loss on marketable securities — — — 724 — 724 Foreign currency translation adjustment — — — ( 52 ) — ( 52 ) Net loss — — — — ( 80,100 ) ( 80,100 ) Balance—March 31, 2023 61,357,932 6 940,004 ( 414 ) ( 799,864 ) 139,732 Issuance of common stock upon the exercise of stock options 35,700 — 74 — — 74 Issuance of common stock upon the vesting of restricted stock units 77,221 — — — — — Lapse of repurchase rights related to common stock issued pursuant to early exercises 3,719 — — — — — Shares issued pursuant to the employee stock purchase plan 155,446 — 993 — — 993 Stock-based compensation expense — — 10,578 — — 10,578 Unrealized gain on marketable securities — — — 128 — 128 Foreign currency translation adjustment — — — ( 6 ) — ( 6 ) Net loss — — — — ( 70,991 ) ( 70,991 ) Balance—June 30, 2023 61,630,018 6 951,649 ( 292 ) ( 870,855 ) 80,508 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. 4 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Condensed Consolidated Statements of Cash Flows (In thousands) (unaudited) Nine Months Ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 129,251 ) $ ( 195,856 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 495 573 Non-cash lease expense 301 266 Amortization of intangible assets 1,646 563 Net accretion on marketable securities ( 5,805 ) ( 5,517 ) Non-cash interest expense 2,809 3,014 Stock-based compensation expense 32,337 30,056 Changes in fair value of embedded derivative instrument ( 429 ) — Changes in operating assets and liabilities: Accounts receivable, net ( 33,133 ) ( 10,959 ) Inventories ( 135 ) ( 6,399 ) Prepaid expenses and other current assets ( 882 ) ( 10,087 ) Accounts payable 2,334 4,345 Accrued liabilities 18,850 ( 323 ) Operating lease liabilities ( 547 ) ( 489 ) Net cash used in operating activities ( 111,410 ) ( 190,813 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities ( 237,421 ) ( 107,660 ) Proceeds from maturities of marketable securities 231,507 350,500 Purchases of property and equipment ( 143 ) ( 422 ) Net cash (used in) provided by investing activities ( 6,057 ) 242,418 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of stock options 1,282 1,041 Proceeds from issuance of common stock pursuant to employee stock purchase plan 649 993 Proceeds from issuance of common stock, net of issuance costs 161,682 — Net cash provided by financing activities 163,613 2,034 Effect of exchange rate changes on cash ( 1 ) ( 118 ) Net increase in cash, cash equivalents, and restricted cash 46,145 53,521 Cash, cash equivalents, and restricted cash at beginning of period 89,323 54,875 Cash, cash equivalents, and restricted cash at end of period $ 135,468 $ 108,396 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: Milestone for intangible asset not yet paid in cash $ 5,000 $ — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest expense paid in cash $ 19,253 $ 18,862 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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 0.3%"), 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 0.3% 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 received FDA approval of ZORYVE ® (roflumilast) cream 0.15%, ("ZORYVE cream 0.15%") on July 9, 2024, for the treatment of mild to moderate atopic dermatitis in adult and pediatric patients 6 years of age and older, and began U.S. commercialization in late July 2024. The Company received Health Canada approval of ZORYVE foam in October 2024. Initial Public Offering and Follow-On Financings On February 4, 2020, the Company closed an initial public offering ("IPO") issuing and selling shares of its 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, August 2022 and October 2023, receiving aggregate net proceeds of $ 93.4 million, $ 207.5 million, $ 161.6 million and $ 95.8 million, respectively. In addition to the sale of common stock, the offering completed in October 2023 consisted of 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 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. The Company also granted the underwriters an option to purchase up to an additional 2,368,421 shares at $ 9.50 per share, which the underwriters exercised in full on February 29, 2024. The aggregate net proceeds to the Company was $ 161.7 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 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. 6 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Liquidity 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 $ 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. See Note 7. On October 8, 2024, the Company paid down $ 100 million of the principal under Loan Agreement with cash. See Note 10. 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, 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 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. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The condensed 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 condensed 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, 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. Actual results could differ from those estimates. Unaudited Interim Condensed Consolidated Financial Statements 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 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. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. 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. 7 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) Restricted Cash 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 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 condensed consolidated balance sheets. 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 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 condensed 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; 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. 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 8 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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 Accounting Standards Codification ("ASC") 280 on an interim and annual basis. 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. 3. Revenue 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 ZORYVE cream 0.3% $ 22,041 $ 8,109 $ 54,325 $ 15,660 ZORYVE foam 20,262 — 40,405 — ZORYVE cream 0.15% 2,452 — 2,452 — Total product revenue, net 44,755 8,109 97,182 15,660 Other revenue — 30,000 28,000 30,420 Total revenues $ 44,755 $ 38,109 $ 125,182 $ 46,080 Other revenue relates primarily to the Sato and Huadong licensing agreements. See Note 6. 9 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 4. 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): September 30, 2024 Level 1 Level 2 Level 3 Total Assets: Money market funds (1) $ 134,851 $ — $ — $ 134,851 Certificates of deposit — 4,995 — 4,995 Corporate debt securities — 99,222 — 99,222 U.S. Treasury and agency securities 91,493 — — 91,493 Total assets $ 226,344 $ 104,217 $ — $ 330,561 ______________ (1) This balance includes cash requirements settled on a nightly basis. 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 ______________ (1) This balance includes cash requirements settled on a nightly basis. Money market funds and U.S. 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. 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. 10 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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): September 30, 2024 Amortized cost Unrealized gains Unrealized losses Estimated fair value Cash and cash equivalents: Money market funds (1) $ 134,851 $ — $ — $ 134,851 Total cash and cash equivalents $ 134,851 $ — $ — $ 134,851 Marketable securities: Certificates of deposit 4,995 — — 4,995 Corporate debt securities 98,981 241 — 99,222 U.S. Treasury and agency securities 91,106 388 ( 1 ) 91,493 Total marketable securities $ 195,082 $ 629 $ ( 1 ) $ 195,710 ______________ (1) This balance includes cash requirements settled on a nightly basis. 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. 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. 11 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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, 2024 Beginning balance $ 849 Gain from changes in fair value ( 429 ) Ending balance $ 420 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 7 for further discussion on the embedded derivative instrument. 5. Balance Sheet Components Inventories The components of inventory are summarized as follows (in thousands): September 30, 2024 December 31, 2023 Raw materials $ 4,089 $ 9,951 Work in progress 1,782 486 Finished goods 8,144 2,697 Total inventories $ 14,015 $ 13,134 Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following (in thousands): September 30, 2024 December 31, 2023 Prepaid co-pay assistance program and rebates $ 8,935 $ 8,608 Prepaid insurance 739 864 Prepaid clinical trial costs — 1,024 Other prepaid expenses and current assets 8,734 8,208 Total prepaid expenses and other current assets $ 18,408 $ 18,704 Accrued Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2024 December 31, 2023 Accrued sales deductions $ 30,029 $ 11,578 Accrued compensation 15,636 14,872 Clinical trial accruals 292 4,192 Accrued expenses and other current liabilities 6,833 3,299 Total accrued liabilities $ 52,790 $ 33,941 6. 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. (“Sato”). Pursuant to the terms of the License Agreement, the Company grants to Sato an exclusive, sublicensable 12 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) (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. Pursuant to the terms of the License Agreement, Sato will, at its expense, develop, obtain regulatory approval for, commercialize, and conduct medical affairs activities related to the Licensed Products in the Field in Japan, subject to certain of the Company’s approval and oversight rights. Pursuant to the terms of the License Agreement, the Company received an upfront payment of $ 25.0 million and will potentially receive additional payments (i) up to an aggregate amount of $ 10.0 million upon the achievement of certain regulatory milestones and (ii) up to an aggregate amount of $ 30.0 million upon the achievement of certain sales milestones. In addition, on a Licensed Product-by-Licensed Product basis, commencing from the first commercial sale of such Licensed Product in Japan until the latest of (i) the expiration of the last valid claim in the intellectual property rights licensed by the Company to Sato under the License Agreement covering such Licensed Product in Japan, (ii) the expiration of regulatory exclusivity for such Licensed Product in Japan, or (iii) ten years after the first commercial sale of such Licensed Product in Japan, the Company will receive low double-digit to mid-teen double-digit percentage royalties on Sato’s, its affiliates’ and sublicensees’ total annual net sales of all Licensed Products, subject to certain royalty reductions. The term of the License Agreement continues until, on a Licensed Product-by-Licensed Product basis, the expiration of the Royalty Term. The License Agreement may be terminated by either party in its entirety if the other party commits a material breach, subject to a cure period, or if the other party becomes insolvent. Sato may terminate the License Agreement at-will in its entirety upon 90 days’ written notice. Unless unenforceable under applicable law, the Company may terminate the License Agreement in its entirety if Sato, its affiliate or sublicensee contests or assists a third party in contesting the scope, validity or enforceability of any patent or patent application licensed by the Company to Sato. 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 zero and $ 25.0 million for the three and nine months ended September 30, 2024, respectively. 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. 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 13 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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: (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. 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 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 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 $ 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 14 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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. 7. Long-term Debt 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 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. 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. See Note 10. 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. 15 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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. 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 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. 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 condensed consolidated statement of operations and comprehensive loss. 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. See Note 4. 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 16 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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. 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 $ 13.9 million is recognized over the life of the term loan through interest expense. 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): September 30, 2024 December 31, 2023 Long-term debt, gross $ 200,000 $ 200,000 Accrued final fee 6,970 4,876 Unamortized debt issuance costs ( 2,362 ) ( 3,077 ) Total carrying value of debt 204,608 201,799 Less current portion ( 99,513 ) — 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. See Note 10. 8. 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 restricted stock unit ("RSU") awards 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 5,059,129 shares of the Company’s common stock, representing approximately 98 % of the total shares of common stock underlying the eligible options. On February 13, 2024, immediately following the expiration of the Option Exchange, the Company granted 2,129,594 shares of Replacement RSU Awards, pursuant to the terms of the Option Exchange. 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 17 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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. 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, 2023 7,919,699 $ 18.52 7.35 $ 1,435 Granted 3,677,916 5.18 Exercised ( 307,919 ) 4.17 Forfeited (1) ( 5,346,477 ) 22.49 Expired ( 308,725 ) 24.44 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) 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 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 The following table summarizes information regarding the Company's RSUs: Number of Units Weighted-Average Grant Date Fair Value Balance—December 31, 2023 2,929,602 $ 15.24 Granted (1) 5,760,872 5.03 Vested ( 1,363,491 ) 11.40 Forfeited ( 839,143 ) 8.67 Unvested Balance—September 30, 2024 6,487,840 $ 7.83 ______________ (1) The number of RSU's granted includes those in association with the Option Exchange as described above. 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 , except those issued in connection with the Option Exchange as described above. 18 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 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 September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Research and development $ 3,342 $ 4,058 $ 10,341 $ 11,966 Selling, general, and administrative 6,899 5,941 21,996 18,090 Total stock-based compensation expense $ 10,241 $ 9,999 $ 32,337 $ 30,056 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 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: Nine Months Ended September 30, 2024 Year Ended December 31, 2023 Expected term (in years) 1.8 – 6.1 5.0 – 6.1 Expected volatility 79.1 – 83.2 % 75.2 – 78.4 % Risk-free interest rate 3.9 – 5.0 % 3.5 – 4.7 % Dividend yield — % — % 9. 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 nine months ended September 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 September 30, 2024 2023 Stock options to purchase common stock 5,634,494 8,228,270 Early exercised options subject to future vesting — 3,698 RSUs subject to future vesting 6,487,840 2,924,356 ESPP shares subject to future issuance 115,926 73,252 Total 12,238,260 11,229,576 19 Table of Contents ARCUTIS BIOTHERAPEUTICS, INC. Notes to Condensed Consolidated Financial Statements (unaudited) 10. Subsequent Events 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. See Note 7. 20 Table of Contents