Arcutis Biotherapeutics, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, and the audited financial statements and notes thereto as of and for the year ended December 31, 2023 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2023, which has been filed with the Securities and Exchange Commission ("SEC"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans, objectives, expectations, projections, and strategy for our business, includes forward-looking statements that involve risks and uncertainties. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “should,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. As a result of many factors, including those factors identified below and those set forth in the “Risk Factors” section of our Annual Report on Form 10-K, our actual results and the timing of selected events could differ materially from the forward-looking statements contained in the following discussion and analysis. Overview We are a commercial-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs. Our current portfolio is comprised of highly differentiated topical and systemic treatments with significant potential to treat immune-mediated dermatological diseases and conditions. We believe we have built the industry's leading platform for dermatologic product development and commercialization. Our strategy is to focus on validated biological targets, and to use our drug development platform and deep dermatology expertise to develop and commercialize differentiated products that have the potential to address the major shortcomings of existing therapies in our targeted indications. We believe this strategy uniquely positions us to rapidly advance our goal of bridging the treatment innovation gap in dermatology, while maximizing our probability of technical success and financial resources. We launched our lead product, ZORYVE ® (roflumilast) cream 0.3% ("ZORYVE cream 0.3%"), in August 2022 after obtaining our initial U.S. Food and Drug Administration ("FDA") approval for the treatment of plaque psoriasis, including psoriasis in the intertriginous areas (e.g. groin or axillae), in individuals 12 years of age or older. ZORYVE cream 0.3% is approved for once-daily treatment of mild, moderate, and severe plaque psoriasis with no limitations on location or duration of use. In October 2023, we received FDA approval for an expanded indication in plaque psoriasis down to 6 years of age. We are currently working with the FDA to potentially further expand this indication in plaque psoriasis down to 2 years of age following the generation of additional clinical data. In April 2023, we had our first commercial launch outside of the United States following Health Canada approval of ZORYVE cream 0.3% for the treatment of plaque psoriasis in individuals 12 years or age or older. ZORYVE cream 0.3% is a once-daily topical formulation of roflumilast, a highly potent and selective phosphodiesterase-4 ("PDE4") inhibitor. PDE4 is an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for the treatment of dermatological conditions. In December 2023, we received FDA approval for ZORYVE ® (roflumilast) topical foam 0.3% ("ZORYVE foam") for the treatment of seborrheic dermatitis in individuals aged 9 years and older, with no limitation on severity, location, or duration of use. ZORYVE foam has been shown to provide rapid disease clearance and significant reduction in itch in clinical trials. In a pivotal Phase 3 study, 80% of individuals treated with ZORYVE foam achieved the primary efficacy endpoint of IGA Success, defined as an IGA score of “clear” or “almost clear” plus a 2-point improvement at Week 8, and just over 50% of individuals achieved an IGA score of clear at Week 8. In addition, individuals treated with ZORYVE foam reported reductions in itch from baseline within 48 hours of first application. ZORYVE foam is a once-daily steroid-free foam and, as a PDE4 inhibitor, is the first drug approved for the treatment of seborrheic dermatitis with a new mechanism of action in over two decades. ZORYVE foam became commercially available in the United States in late January 2024, and announced Health Canada approval on October 18, 2024 and will become commercially available in Canada by the end of 2024. Seborrheic dermatitis is estimated to occur in as many as 10 million people in the United States, and is associated with a substantial psychosocial burden for those suffering from the disease. 21 Table of Contents In addition to the approval of ZORYVE cream 0.3% for plaque psoriasis and ZORYVE foam for seborrheic dermatitis, we also received FDA approval for and commercially launched ZORYVE (roflumilast) cream 0.15% ("ZORYVE cream 0.15%"), (collectively, "ZORYVE") in July 2024 for the treatment of mild to moderate atopic dermatitis in adults and pediatric patients 6 years of age and older, with no limitation on location, body surface area treated, concomitant use, or duration of use. ZORYVE cream 0.15% is a once-daily, steroid-free cream that provides rapid disease clearance and significant reduction in itch and has been specifically developed to be a treatment option for long-term disease control. We have also completed a Phase 3 trial of ZORYVE cream 0.05% in pediatric patients 2 to 5 years of age with mild to moderate atopic dermatitis (INTEGUMENT-PED). Based on the positive results from the INTEGUMENT-PED study, and given our recent approval of ZORYVE cream 0.15% for the treatment of mild to moderate atopic dermatitis in individuals 6 years of age or older, we expect to submit a supplemental new drug application ("sNDA") for topical ZORYVE cream 0.05% for children 2 to 5 years of age in the first quarter of 2025. We conducted INTEGUMENT-OLE, an open label extension study of the long-term safety of ZORYVE cream 0.15% in subjects 6 years of age or older and ZORYVE cream 0.05% in subjects between the ages 2 and 5 years, for which we reported positive results in August 2024. Beyond seborrheic dermatitis, we are also developing ZORYVE foam for scalp and body psoriasis and have successfully completed our Phase2b and pivotal Phase 3 clinical trials. We announced positive topline data in September 2022, and we submitted an sNDA to the FDA for a label expansion to include scalp and body psoriasis in adults and adolescents ages 12 and over, which was recently accepted by the FDA with a Prescription Drug User Fee Act ("PDUFA") target action date in May 2025. Based on market research and our internal estimates, we estimate there is an overall patient market of approximately 15.2 million patients in the United States that are treated with topical therapies for plaque psoriasis, seborrheic dermatitis, and atopic dermatitis in dermatology offices (approximately 7.8 million) and outside dermatology (approximately 7.4 million). Of the patients that are treated in dermatology offices, we estimate that approximately 3.3 million of these patients are addressable or accessible with Medicare and Medicaid coverage and that approximately 4.4 million patients across plaque psoriasis, seborrheic dermatitis, and atopic dermatitis are covered by commercial insurance. Patients that are treated outside of dermatology offices are primarily addressable through primary care physicians and pediatricians. In July 2024, we entered into a co-promotion agreement with Kowa Pharmaceuticals, Inc. to leverage Kowa's primary care sales force to exclusively market and promote ZORYVE in the United States to primary care practitioners and pediatricians for all FDA-approved indications until at least July 2029. Under the terms of the agreement, Kowa will receive a commission from net sales attributed to Kowa. Promotion of ZORYVE in primary care and pediatrics under the Kowa agreement began in late September. In addition to ZORYVE, we are developing ARQ-255, a deep-penetrating topical formulation of ivarmacitinib, a potent and highly selective topical Janus kinase type 1 ("JAK1") inhibitor, designed to preferentially deliver the drug deep into the hair follicle, the site of inflammation in alopecia areata, in order to potentially develop the first topical treatment for this disease. We recently completed enrollment in a Phase 1b study evaluating ARQ-255 for the treatment of alopecia areata and expect data in the first half of 2025. In September 2022, we acquired Ducentis BioTherapeutics LTD ("Ducentis") and its lead asset, DS-234 (now ARQ-234), a fusion protein that is a potent and highly selective checkpoint agonist of the CD200 Receptor (CD200R). Currently in the preclinical stage, we plan to develop ARQ-234 in atopic dermatitis, where we believe it could be a potentially highly complementary biologic treatment option to ZORYVE cream in that indication, if approved. ARQ-234 could potentially be used to treat other inflammatory conditions as well. We are working towards submitting an IND during 2025. We have incurred net losses in each year since inception, including net losses of $129.3 million and $195.9 million for the nine months ended September 30, 2024 and 2023, respectively. As of September 30, 2024, we had an accumulated deficit of $1,111.2 million and cash, cash equivalents, restricted cash, and marketable securities of $331.2 million. As of September 30, 2024, we had $200.0 million outstanding under the Loan Agreement, of which we paid down $100.0 million of principal from our available cash on October 8, 2024, with the right to re-draw that principal for a defined period. See Note 10 to the condensed consolidated financial statements for additional information. We expect to continue to incur losses and significant expenses as we commercialize ZORYVE, and as we advance our product candidates and label extensions through clinical trials, regulatory submissions, and 22 Table of Contents commercialization. We expect to incur significant and prioritized commercialization expenses related to the sales, marketing, manufacturing, and distribution of ZORYVE, while we focus our clinical development spend on ARQ-234, ARQ-255, and ZORYVE label extensions, if we obtain regulatory approval for them. If our available cash and marketable securities balances, amounts available under the Loan Agreement, and anticipated future cash flows from operations are insufficient to cover these expenses, we may need to fund our operations through equity or debt financings or other sources, such as future potential collaboration agreements. Adequate funding may not be available to us on acceptable terms, or at all. Any failure to obtain sufficient funds on acceptable terms as and when needed could have a material adverse effect on our business, results of operations, and financial condition. See “Liquidity, Capital Resources, and Requirements” below and Note 1 to the condensed consolidated financial statements for additional information. We rely on third parties to conduct our nonclinical studies and clinical trials and for manufacturing and supply of our product candidates. We have no internal manufacturing capabilities, and we will continue to rely on third parties, many of whom are single source suppliers, for our nonclinical and clinical trial materials, as well as the commercial supply of our products. 23 Table of Contents Components of Our Results of Operations Revenue Product Revenue, Net In August 2022, in conjunction with the launch of our first FDA approved product, ZORYVE cream 0.3%, we began to recognize revenue from product sales, net of rebates, chargebacks, discounts, and other adjustments. Additionally, in June 2023, we began recognizing revenue net of deductions for ZORYVE cream 0.3% in Canada and, in January 2024, for ZORYVE foam. We received FDA approval of ZORYVE cream 0.15% for atopic dermatitis and began recognizing related revenues in July 2024. We will continue to evaluate trends related to revenue for ZORYVE. Additionally, if our development efforts for our other product candidates and ZORYVE label extensions are successful and result in regulatory approval, we may generate additional revenue in the future from product sales. Other Revenue Other revenue relates to our license agreements, primarily the Sato License Agreement and the Huadong License and Collaboration Agreement. See Note 6 to the condensed consolidated financial statements for additional information. Cost of Sales Cost of sales includes direct and indirect costs related to the manufacturing and distribution of ZORYVE, including raw materials, third-party manufacturing costs, packaging services, and freight-in, as well as third-party royalties payable on our net product sales and amortization of intangible assets associated with ZORYVE. Our cost of sales will reflect a lower average per unit cost of materials until inventory that was previously expensed is sold, which is expected to occur over the next seven months. As of September 30, 2024 and December 31, 2023, the value of this inventory, mostly at the raw materials stage, was approximately $3.4 million and $8.7 million, respectively. Operating Expenses Research and Development Expenses Since our inception, we have focused significant resources on our research and development activities, including conducting nonclinical studies and clinical trials, manufacturing development efforts, and activities related to regulatory filings for our product candidates. Research and development costs are expensed as incurred. These costs include direct program expenses, which are payments made to third parties that specifically relate to our research and development, such as payments to clinical research organizations, clinical investigators, manufacturing of clinical material, nonclinical testing, and consultants. In addition, employee costs, including salaries, payroll taxes, benefits, stock-based compensation, and travel for employees contributing to research and development activities are classified as research and development costs. We allocate direct external costs on a program specific basis (topical roflumilast program, topical JAK inhibitor program, and early-stage programs). Our internal costs are primarily related to personnel or professional services and apply across programs, and thus are not allocable on a program specific basis. We expect to continue to incur research and development expenses in the future as we develop our product candidates. In particular, we expect to incur research and development expenses for the phase 1 ARQ-255 study for alopecia areata and early development of ARQ-234 for atopic dermatitis. We have entered, and may continue to enter, into license agreements to access and utilize certain molecules for the treatment of dermatological diseases and disorders. We evaluate if the license agreement is an acquisition of an asset or a business. To date, none of our license agreements have been considered to be an acquisition of a business. For asset acquisitions, the upfront payments, as well as any future milestone payments made before product approval, are immediately recognized as research and development expense when due, provided there is no alternative future use of the rights in other research and development projects. The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing, or costs required to complete the remaining development of ZORYVE cream 0.3%, ZORYVE cream 0.15%, ZORYVE foam, ARQ-255, and ARQ-234 or any other product candidates. This is due 24 Table of Contents to the numerous risks and uncertainties associated with the development of product candidates. See “Risk Factors” for a discussion of the risks and uncertainties associated with the development of our product candidates. Selling, General and Administrative Expenses Our selling, general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel, and costs related to sales and marketing of ZORYVE. Other selling, general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for auditing, tax, and general legal services. The commission paid to Kowa under our co-promotion agreement will also be recorded as a selling expense. We expect our selling, general and administrative expenses to continue to increase in the future as we continue to commercialize ZORYVE and potentially other product candidates and support our operations, including increased expenses related to legal, accounting, insurance, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, directors and officers liability insurance premiums, and investor relations activities. Other Income, Net Other income, net primarily consists of interest income earned on our cash, cash equivalents, and marketable securities, as well as changes in the fair value of the derivative related to our debt. See Note 7 to the condensed consolidated financial statements for additional information. Interest Expense Interest expense is related to interest incurred on our long-term debt. Provision for Income Taxes Provision for income taxes is related to the Huadong License and Collaboration Agreement . See Note 6 to the condensed consolidated financial statements for additional information. 25 Table of Contents Results of Operations Comparison of the Three Months Ended September 30, 2024 and 2023 The following table sets forth our results of operations for the periods indicated: Three Months Ended September 30, Change 2024 2023 $ % (in thousands) Revenues: Product revenue, net $ 44,755 $ 8,109 $ 36,646 452 % Other revenue — 30,000 (30,000) (100) % Total revenues 44,755 38,109 6,646 17 % Operating expenses: Cost of sales 5,503 1,182 4,321 366 % Research and development 19,501 26,236 (6,735) (26) % Selling, general, and administrative 58,817 47,595 11,222 24 % Total operating expenses 83,821 75,013 8,808 12 % Loss from operations (39,066) (36,904) (2,162) 6 % Other income (expense): Other income, net 4,182 2,721 1,461 54 % Interest expense (6,653) (7,559) 906 (12) % Loss before income taxes (41,537) (41,742) 205 — % Provision for income taxes — 3,023 (3,023) (100) % Net loss $ (41,537) $ (44,765) $ 3,228 (7) % ______________ *Not applicable Product Revenue, Net We began recording U.S. product revenue in the third quarter of 2022 following the FDA approval and subsequent commercial launch of ZORYVE cream 0.3% in August 2022, and Canada product revenue in the second quarter of 2023 following the Health Canada approval and subsequent commercial launch of ZORYVE cream 0.3% in June 2023. We since recorded U.S. revenue in the first quarter of 2024 following the FDA approval and subsequent commercial launch of ZORYVE foam in January 2024. In the third quarter of 2024, we recorded U.S. product revenue following the FDA approval and subsequent commercial launch of ZORYVE cream 0.15% in July 2024. Three Months Ended September 30, Change 2024 2023 $ % (in thousands) Product revenue, net ZORYVE cream 0.3% $ 22,041 $ 8,109 $ 13,932 172 % ZORYVE foam 20,262 — 20,262 * ZORYVE cream 0.15% 2,452 — 2,452 * Total product revenue, net $ 44,755 $ 8,109 $ 36,646 452 % ______________ 26 Table of Contents *Not applicable Product revenue, net, for ZORYVE cream 0.3% increased by $13.9 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily driven by higher end customer demand and improving gross-to-net discounts for ZORYVE cream 0.3% in the United States. Product revenue, net, for ZORYVE foam increased by $20.3 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, driven by its commercial launch in January 2024. Product revenue, net, for ZORYVE cream 0.15% were $2.5 million for the three months ended September 30, 2024 compared to no sales in the three months ended September 30, 2023, driven by its commercial launch in July 2024. Other Revenue Other revenue for the three months ended September 30, 2023 were the result of license revenues received in connection with the Huadong Agreement. See Note 6 to the condensed consolidated financial statements for additional information. Cost of Sales Cost of sales increased by $4.3 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase is related primarily to an increase in customer demand for ZORYVE cream 0.3% and foam. Prior to the dates on which the initial regulatory approvals were received for each product, costs of raw materials were recorded as research and development expense. Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to occur over the next seven months. See Note 5 to the condensed consolidated financial statements for additional information. Research and Development Expenses Three Months Ended September 30, Change 2024 2023 $ % (in thousands) Direct external costs: Topical roflumilast program $ 1,320 $ 6,020 $ (4,700) (78) % Topical JAK inhibitor program 1,089 978 111 11 % Other early-stage programs 2,910 2,026 884 44 % Indirect costs: Compensation and personnel-related 9,834 12,289 (2,455) (20) % Other 4,348 4,923 (575) (12) % Total research and development expense $ 19,501 $ 26,236 $ (6,735) (26) % Research and development expenses decreased by $6.7 million, or 26%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease was primarily due to the completion of Phase 3 studies of roflumilast cream in atopic dermatitis, coupled with a decrease in compensation and personnel-related expenses. 27 Table of Contents Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased by $11.2 million, or 24%, for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase was primarily due to an increase in compensation and personnel-related expenses of $7.6 million and an increase in sales and marketing expenses of $3.2 million. These increases were primarily due to our continued commercialization efforts for ZORYVE. Other Income, Net Other income, net increased by $1.5 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily due to the impact of higher interest rates, coupled with a higher marketable securities balance. Interest Expense Interest expense decreased by $0.9 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, due to the impact of lower interest rates. See Note 7 to the condensed consolidated financial statements for additional information. Provision for Income Taxes Income tax expense of $3.0 million for the three months ended September 30, 2023 was primarily due to income tax expense related to withholding tax on the Huadong License and Collaboration Agreement. See Note 6 to the condensed consolidated financial statements for additional information. Comparison of the Nine Months Ended September 30, 2024 and 2023 The following table sets forth our results of operations for the periods indicated: Nine Months Ended September 30, Change 2024 2023 $ % (in thousands) Revenues: Product revenue, net $ 97,182 $ 15,660 $ 81,522 521 % Other revenue 28,000 30,420 (2,420) (8) % Total revenues 125,182 46,080 79,102 172 % Operating expenses: Cost of sales 12,223 2,741 9,482 346 % Research and development 61,940 86,800 (24,860) (29) % Selling, general, and administrative 171,784 136,471 35,313 26 % Total operating expenses 245,947 226,012 19,935 9 % Loss from operations (120,765) (179,932) 59,167 (33) % Other income (expense): Other income, net 13,455 9,114 4,341 48 % Interest expense (21,617) (21,950) 333 (2) % Loss before income taxes (128,927) (192,768) 63,841 (33) % Provision for income taxes 324 3,088 (2,764) (90) % Net loss $ (129,251) $ (195,856) $ 66,605 (34) % ______________ 28 Table of Contents *Not applicable Product Revenue, Net We began recording U.S. product revenue in the third quarter of 2022 following the FDA approval and subsequent commercial launch of ZORYVE cream 0.3% in August 2022, and Canada product revenue in the second quarter of 2023 following the Health Canada approval and subsequent commercial launch of ZORYVE cream 0.3% in June 2023. We since recorded U.S. revenue in the first quarter of 2024 following the FDA approval and subsequent commercial launch of ZORYVE foam in January 2024. In the third quarter of 2024, we recorded U.S. product revenue following the FDA approval and subsequent commercial launch of ZORYVE cream 0.15% in July 2024. Nine Months Ended September 30, Change 2024 2023 $ % (in thousands) Product revenue, net ZORYVE cream 0.3% $ 54,325 $ 15,660 $ 38,665 247 % ZORYVE foam 40,405 — 40,405 * ZORYVE cream 0.15% 2,452 — 2,452 * Total product revenue, net $ 97,182 $ 15,660 $ 81,522 521 % ______________ *Not applicable Product revenue, net, for ZORYVE cream 0.3% increased by $38.7 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by higher end customer demand and improvements in gross-to-net discounts for ZORYVE cream 0.3% in the United States and the commercial launch of ZORYVE cream 0.3% in Canada in June 2023. Product revenue, net, for ZORYVE foam increased by $40.4 million for the nine months ended September 30, 2024 compared to no sales in the nine months ended September 30, 2023, driven by its commercial launch in January 2024. Product revenue, net, for ZORYVE cream 0.15% were $2.5 million for the nine months ended September 30, 2024 compared to no sales in the nine months ended September 30, 2023, driven by its commercial launch in July 2024. Other Revenue Other revenue in the nine months ended September 30, 2024 includes $25.0 million received as an upfront payment in connection with the Sato Agreement and a $3.0 milestone payment received in connection with the Huadong Agreement. Other revenue in the nine months ended September 30, 2023 primarily includes license revenues received in connection with the Huadong Agreement. See Note 6 to the condensed consolidated financial statements for additional information. Cost of Sales Cost of sales increased by $9.5 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase is related primarily to an increase in customer demand for ZORYVE cream 0.3% and foam. Prior to the dates on which the initial regulatory approvals were received for each product, costs of raw materials were recorded as research and development expense. Therefore, cost of sales will reflect a lower average per unit cost until the related inventory is sold, which is expected to occur over the next seven months. See Note 5 to the condensed consolidated financial statements for additional information. 29 Table of Contents Research and Development Expenses Nine Months Ended September 30, Change 2024 2023 $ % (in thousands) Direct external costs: Topical roflumilast program $ 7,839 $ 28,974 $ (21,135) (73) % Topical JAK inhibitor program 2,351 2,832 (481) (17) % Other early-stage programs 8,878 3,869 5,009 129 % Indirect costs: Compensation and personnel-related 29,574 34,784 (5,210) (15) % Other 13,298 16,341 (3,043) (19) % Total research and development expense $ 61,940 $ 86,800 $ (24,860) (29) % Research and development expenses decreased by $24.9 million, or 29%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily due to the completion of Phase 3 studies of roflumilast cream in atopic dermatitis, coupled with decreases in compensation and personnel-related expenses and consulting costs, partially offset by manufacturing and preclinical costs incurred related to the development of early-stage programs. Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased by $35.3 million, or 26%, for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase was primarily due to an increase in compensation and personnel-related expenses of $19.1 million and an increase in sales and marketing expenses of $14.7 million. These increases were primarily due to our continued commercialization efforts for ZORYVE. Other Income, Net Other income, net increased by $4.3 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to the impact of higher interest rates and higher marketable securities balance. Interest Expense Interest expense decreased by $0.3 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, due to the impact of lower interest rates. See Note 7 to the condensed consolidated financial statements for additional information. Provision for Income Taxes Income tax expense of $0.3 million and $3.0 million for the nine months ended September 30, 2024 and 2023, respectively, were primarily due to withholding tax on the Huadong License and Collaboration Agreement. See Note 6 to the condensed consolidated financial statements for additional information. 30 Table of Contents Liquidity, Capital Resources, and Requirements Sources of Liquidity Our primary sources of capital to date have been private placements of preferred stock, our IPO completed in January 2020, our follow-on financings in October 2020, February 2021, August 2022, October 2023, and March 2024, our Loan Agreement, our ATM program, and revenue from the sale of ZORYVE. We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop and commercialize our products and product candidates, including conducting nonclinical and clinical trials and providing selling, general and administrative support for these operations. As of September 30, 2024, we had cash, cash equivalents, restricted cash, and marketable securities of $331.2 million, and an accumulated deficit of $1,111.2 million. We maintain cash balances with financial institutions in excess of insured limits. As of September 30, 2024, we had $200.0 million outstanding under the Loan Agreement, of which we paid down $100.0 million of principal from available cash on October 8, 2024, with the right to re-draw that principal for a defined period. See Note 10 to the condensed consolidated financial statements for additional information. If our capital resources are insufficient to satisfy our requirements, we may need to fund our operations through the sale of our equity securities, accessing or incurring additional debt, entering into licensing or collaboration agreements with partners, grants, or other sources of financing. There can be no assurance that sufficient funds will be available to us at all or on attractive terms when needed from these sources. If we are unable to obtain additional funding from these or other sources when needed it may be necessary to significantly reduce our current rate of spending through, among other things, reductions in staff and delaying, scaling back, or stopping certain research and development programs, nonclinical studies, clinical trials or other development activities, and commercialization efforts. Insufficient liquidity may also require us to relinquish rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. In addition, market conditions impacting financial institutions could impact our ability to access some or all of our cash, cash equivalents and marketable securities, and we may be unable to obtain alternative funding when and as needed on acceptable terms, if at all. We have based our projected operating requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development, and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. Any future funding requirements will depend on many factors, including, but not limited to: • the timing, receipt, and amount of sales of any current and future products; • the scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting nonclinical studies and clinical trials, in particular our planned or ongoing development activities and our formulation and nonclinical efforts; • suspensions or delays in the enrollment or changes to the number of subjects we decide to enroll in our ongoing clinical trials; • the number and scope of clinical programs we decide to pursue, and the number and characteristics of any product candidates we develop or acquire; • the timing of, and the costs involved in, obtaining regulatory approvals for any future product candidates; • the number and characteristics of any additional product candidates we develop or acquire; • the cost of manufacturing ZORYVE or any future product candidates and any products we successfully commercialize, including costs associated with building out our supply chain; • the cost of commercialization activities for ZORYVE or any future product candidates that are approved for sale, including marketing, sales and distribution costs, and any discounts or rebates to obtain access; • our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of any such agreements that we may enter into; • the costs related to milestone payments to AstraZeneca, Hengrui or any future collaborator or licensing partner, upon the achievement of predetermined milestones; • any product liability or other lawsuits related to our products; 31 Table of Contents • the expenses needed to attract and retain skilled personnel; • the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing our intellectual property portfolio; and • costs associated with any adverse market conditions or other macroeconomic factors. Indebtedness On December 22, 2021, we 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., a corporation incorporated under the laws of the Province of Ontario, as a borrower and party. On November 1, 2023, we 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, we 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") 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. 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 in December 2021. With the approval of ZORYVE cream 0.3% on July 29, 2022, the tranche B term loans were funded in August 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. In October 2024, we made a 2024 Partial Prepayment of $100.0 million, which reduced the aggregate principal amount outstanding under the Loan Agreement to $100.0 million. In connection with the 2024 Partial Prepayment, we are 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 us 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 our projected net product revenue as set forth in its annual plan for the respective period, we 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 (such date, the “Maturity Date”), (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) we are no longer subject to certain cost and purchase price restrictions regarding acquisitions, and (iv) we 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. Principal amounts outstanding under the Term Loans will generally 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. Any principal amounts outstanding under the Term Loans, if not repaid or prepaid, are due and payable on August 1, 2029. As security for the obligations under the Loan Agreement, we granted SLR, for the benefit of the lenders, a continuing security interest in substantially all of our assets, including our intellectual property, subject to certain exceptions. 32 Table of Contents If the Term Loans are accelerated due to, among others, the occurrence of a bankruptcy or insolvency event, we are required to make certain 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 our ability to dispose of our business or property, to change our 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 our property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock or to redeem capital stock. We also agreed to a financial covenant whereby we must generate a minimum net product revenue equal to 75% of our projected net product revenue as set forth in our 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 our board of directors and SLR, in its capacity as collateral agent, in its reasonable discretion. Any failure by us to deliver such annual plan on or before December 15 of the prior year shall be an immediate event of default. In addition, the Loan Agreement contains customary events of default that entitle the lenders to cause any indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against us and the collateral securing the Term Loans. Upon the occurrence and for the duration of an event of default, an additional default interest rate (the "Default Rate") equal to 4.0% per annum will apply to all obligations owed under the Loan Agreement. In connection with the Loan Agreement, we are 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 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 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, we previously had entered into an Exit Fee Agreement, whereby we 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. We were in compliance with all covenants under the Loan Agreement as of September 30, 2024. 33 Table of Contents Cash Flows The following table sets forth our cash flows for the periods indicated: Nine Months Ended September 30, 2024 2023 (in thousands) Cash used in operating activities $ (111,410) $ (190,813) Cash (used in) provided by investing activities (6,057) 242,418 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 Net Cash Used in Operating Activities During the nine months ended September 30, 2024, net cash used in operating activities was $111.4 million, which consisted of a net loss of $129.3 million and a change in net operating assets and liabilities of $13.5 million, partially offset by net non-cash charges of $31.4 million. The net non-cash charges were primarily related to stock-based compensation expense of $32.3 million. During the nine months ended September 30, 2023, net cash used in operating activities was $190.8 million, which consisted of a net loss of $195.9 million and a change in net operating assets and liabilities of $23.9 million, partially offset by net non-cash charges of $29.0 million. The net non-cash charges were primarily related to stock-based compensation expense of $30.1 million. Net Cash (Used in) Provided by Investing Activities During the nine months ended September 30, 2024, net cash used in investing activities was $6.1 million, which was comprised primarily of purchases of marketable securities of $237.4 million, offset by proceeds from the maturities of marketable securities of $231.5 million. During the nine months ended September 30, 2023, net cash provided by investing activities was $242.4 million, which was comprised primarily of proceeds from the maturities of marketable securities of $350.5 million, partially offset by purchases of marketable securities of $107.7 million. Net Cash Provided by Financing Activities During the nine months ended September 30, 2024, net cash provided by financing activities was $163.6 million, which was comprised primarily of $161.7 million of net proceeds from our February 2024 public stock offering. During the nine months ended September 30, 2023, net cash provided by financing activities was $2.0 million, which was comprised of $1.0 million in proceeds from the issuance of common stock upon the exercise of stock options and $1.0 million in proceeds from the issuance of common stock as part of our ESPP. Contractual Obligations and Contingent Liabilities Except as set forth in Note 7, Long-term Debt, and Note 10, Subsequent Events, of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023. Smaller Reporting Company Status As of June 30, 2024, the market value of our ordinary shares held by non-affiliates exceeded $700.0 million. As a result, we will be a large accelerated filer. Additionally, we will no longer qualify as a smaller reporting company beginning with our first Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2025. As a result of this transition, we will be subject to certain disclosure and compliance requirements that apply to other public companies but did not previously apply to us and we will also not be able to take advantage of certain scaled disclosures available to smaller reporting companies. 34 Table of Contents