arqt-20210331
000178730612-312021Q1False0.4998P3Y0.2500017873062021-01-012021-03-31xbrli:shares00017873062021-04-30iso4217:USD00017873062021-03-3100017873062020-12-31iso4217:USDxbrli:shares00017873062020-01-012020-03-3100017873062019-12-310001787306us-gaap:CommonStockMember2019-12-310001787306us-gaap:AdditionalPaidInCapitalMember2019-12-310001787306us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310001787306us-gaap:RetainedEarningsMember2019-12-310001787306us-gaap:CommonStockMember2020-01-012020-03-310001787306us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-310001787306us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310001787306us-gaap:RetainedEarningsMember2020-01-012020-03-3100017873062020-03-310001787306us-gaap:CommonStockMember2020-03-310001787306us-gaap:AdditionalPaidInCapitalMember2020-03-310001787306us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-310001787306us-gaap:RetainedEarningsMember2020-03-310001787306us-gaap:CommonStockMember2020-12-310001787306us-gaap:AdditionalPaidInCapitalMember2020-12-310001787306us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-12-310001787306us-gaap:RetainedEarningsMember2020-12-310001787306us-gaap:CommonStockMember2021-01-012021-03-310001787306us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-310001787306us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-01-012021-03-310001787306us-gaap:RetainedEarningsMember2021-01-012021-03-310001787306us-gaap:CommonStockMember2021-03-310001787306us-gaap:AdditionalPaidInCapitalMember2021-03-310001787306us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-03-310001787306us-gaap:RetainedEarningsMember2021-03-310001787306us-gaap:CommonStockMemberus-gaap:IPOMember2020-02-042020-02-040001787306us-gaap:CommonStockMemberus-gaap:IPOMember2020-02-040001787306us-gaap:CommonStockMemberus-gaap:OverAllotmentOptionMember2020-02-042020-02-040001787306us-gaap:IPOMember2020-02-042020-02-0400017873062020-02-050001787306us-gaap:CommonStockMemberarqt:SecondaryEquityPublicOfferingMember2020-10-062020-10-060001787306us-gaap:CommonStockMemberarqt:SecondaryEquityPublicOfferingMember2020-10-060001787306arqt:SecondaryEquityPublicOfferingMember2020-10-062020-10-060001787306us-gaap:CommonStockMemberus-gaap:PrivatePlacementMember2020-10-062020-10-060001787306us-gaap:PrivatePlacementMember2020-10-062020-10-060001787306us-gaap:CommonStockMemberarqt:ThirdEquityPublicOfferingMember2021-02-052021-02-050001787306us-gaap:CommonStockMemberarqt:ThirdEquityPublicOfferingMember2021-02-050001787306us-gaap:CommonStockMemberus-gaap:OverAllotmentOptionMember2021-02-052021-02-050001787306arqt:ThirdEquityPublicOfferingMember2021-02-052021-02-05xbrli:pure00017873062020-01-172020-01-17arqt:segment0001787306srt:MinimumMember2021-01-012021-03-310001787306srt:MaximumMember2021-01-012021-03-310001787306us-gaap:CommonStockMember2020-02-012020-02-290001787306us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2021-03-310001787306us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2021-03-310001787306us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel3Member2021-03-310001787306us-gaap:MoneyMarketFundsMember2021-03-310001787306us-gaap:CommercialPaperMemberus-gaap:FairValueInputsLevel1Member2021-03-310001787306us-gaap:FairValueInputsLevel2Memberus-gaap:CommercialPaperMember2021-03-310001787306us-gaap:CommercialPaperMemberus-gaap:FairValueInputsLevel3Member2021-03-310001787306us-gaap:CommercialPaperMember2021-03-310001787306us-gaap:FairValueInputsLevel1Memberus-gaap:USTreasurySecuritiesMember2021-03-310001787306us-gaap:FairValueInputsLevel2Memberus-gaap:USTreasurySecuritiesMember2021-03-310001787306us-gaap:USTreasurySecuritiesMemberus-gaap:FairValueInputsLevel3Member2021-03-310001787306us-gaap:USTreasurySecuritiesMember2021-03-310001787306us-gaap:FairValueInputsLevel1Member2021-03-310001787306us-gaap:FairValueInputsLevel2Member2021-03-310001787306us-gaap:FairValueInputsLevel3Member2021-03-310001787306us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2020-12-310001787306us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel2Member2020-12-310001787306us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel3Member2020-12-310001787306us-gaap:MoneyMarketFundsMember2020-12-310001787306us-gaap:CommercialPaperMemberus-gaap:FairValueInputsLevel1Member2020-12-310001787306us-gaap:FairValueInputsLevel2Memberus-gaap:CommercialPaperMember2020-12-310001787306us-gaap:CommercialPaperMemberus-gaap:FairValueInputsLevel3Member2020-12-310001787306us-gaap:CommercialPaperMember2020-12-310001787306us-gaap:FairValueInputsLevel1Memberus-gaap:USTreasurySecuritiesMember2020-12-310001787306us-gaap:FairValueInputsLevel2Memberus-gaap:USTreasurySecuritiesMember2020-12-310001787306us-gaap:USTreasurySecuritiesMemberus-gaap:FairValueInputsLevel3Member2020-12-310001787306us-gaap:USTreasurySecuritiesMember2020-12-310001787306us-gaap:FairValueInputsLevel1Member2020-12-310001787306us-gaap:FairValueInputsLevel2Member2020-12-310001787306us-gaap:FairValueInputsLevel3Member2020-12-3100017873062020-01-012020-12-310001787306us-gaap:ComputerEquipmentMember2021-01-012021-03-310001787306us-gaap:ComputerEquipmentMember2021-03-310001787306us-gaap:ComputerEquipmentMember2020-12-310001787306us-gaap:FurnitureAndFixturesMember2021-01-012021-03-310001787306us-gaap:FurnitureAndFixturesMember2021-03-310001787306us-gaap:FurnitureAndFixturesMember2020-12-310001787306us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2021-01-012021-03-310001787306us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2021-03-310001787306us-gaap:SoftwareAndSoftwareDevelopmentCostsMember2020-12-310001787306us-gaap:ConstructionInProgressMember2021-03-310001787306us-gaap:ConstructionInProgressMember2020-12-310001787306us-gaap:LeaseholdImprovementsMember2021-03-310001787306us-gaap:LeaseholdImprovementsMember2020-12-310001787306arqt:AstraZenecaMember2018-07-012018-07-310001787306arqt:AstraZenecaMemberus-gaap:SeriesBPreferredStockMember2018-07-012018-07-310001787306arqt:AstraZenecaMember2019-08-012019-08-310001787306arqt:AstraZenecaMember2021-01-012021-03-310001787306arqt:AstraZenecaMember2020-01-012020-03-310001787306arqt:HengruiMember2018-01-012018-01-310001787306arqt:HengruiMember2019-12-012019-12-310001787306arqt:HengruiMember2021-01-012021-03-310001787306arqt:HengruiMember2020-01-012020-03-310001787306arqt:HawkeyeMember2019-06-300001787306arqt:HawkeyeMember2019-06-300001787306arqt:HawkeyeMember2019-06-012019-06-300001787306arqt:HawkeyeMember2021-01-012021-03-31utr:sqft0001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-04-012020-04-3000017873062020-04-012020-04-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-04-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-11-300001787306arqt:ThirdAnniversaryMemberarqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-11-012020-11-300001787306arqt:FirstAnniversaryMemberarqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-11-012020-11-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMemberarqt:SecondAnniversaryMember2020-11-012020-11-300001787306arqt:FourthAnniversaryMemberarqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-11-012020-11-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMemberarqt:FifthAnniversaryMember2020-11-012020-11-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMemberarqt:SubsequentAnniversariesMember2020-11-012020-11-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMember2020-06-300001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMember2021-03-310001787306arqt:WestlakeVillageCaliforniaLeaseArrangementMember2021-01-012021-03-31arqt:vote0001787306arqt:StockOptionsIssuedAndOutstandingMember2021-03-310001787306arqt:StockOptionsIssuedAndOutstandingMember2020-12-310001787306arqt:StockAwardsFutureGrantMember2021-03-310001787306arqt:StockAwardsFutureGrantMember2020-12-310001787306us-gaap:RestrictedStockUnitsRSUMember2021-03-310001787306us-gaap:RestrictedStockUnitsRSUMember2020-12-3100017873062020-02-040001787306arqt:A2020EquityIncentivePlanMember2020-01-300001787306arqt:A2017EquityIncentivePlanMember2020-01-300001787306arqt:A2020EquityIncentivePlanMember2021-01-012021-01-010001787306arqt:A2020EquityIncentivePlanMember2021-03-310001787306arqt:A2020EquityIncentivePlanMemberus-gaap:EmployeeStockOptionMember2021-01-012021-03-310001787306us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-03-310001787306us-gaap:RestrictedStockUnitsRSUMember2019-01-012019-12-310001787306us-gaap:ResearchAndDevelopmentExpenseMember2021-01-012021-03-310001787306us-gaap:ResearchAndDevelopmentExpenseMember2020-01-012020-03-310001787306us-gaap:GeneralAndAdministrativeExpenseMember2021-01-012021-03-310001787306us-gaap:GeneralAndAdministrativeExpenseMember2020-01-012020-03-310001787306us-gaap:EmployeeStockOptionMember2021-03-310001787306us-gaap:EmployeeStockOptionMember2021-01-012021-03-310001787306us-gaap:StockCompensationPlanMember2021-03-012021-03-310001787306arqt:A2020EquityIncentivePlanMember2021-01-012021-03-310001787306srt:MinimumMemberus-gaap:EmployeeStockOptionMember2021-01-012021-03-310001787306srt:MaximumMemberus-gaap:EmployeeStockOptionMember2021-01-012021-03-310001787306srt:MinimumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-12-310001787306srt:MaximumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-12-310001787306us-gaap:EmployeeStockOptionMember2020-01-012020-12-310001787306arqt:A2017EquityIncentivePlanMember2021-03-310001787306arqt:A2017EquityIncentivePlanMember2020-12-310001787306us-gaap:RestrictedStockMember2016-08-012016-08-310001787306arqt:ServiceConditionRestrictedStockMember2016-08-012016-08-310001787306arqt:PerformanceConditionRestrictedStockMember2016-08-012016-08-310001787306arqt:ServiceConditionRestrictedStockMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2016-08-012016-08-310001787306arqt:ServiceConditionRestrictedStockMemberus-gaap:ShareBasedCompensationAwardTrancheTwoMember2016-08-012016-08-310001787306us-gaap:EmployeeStockMember2020-01-302020-01-300001787306us-gaap:CommonStockMemberus-gaap:EmployeeStockMember2020-01-300001787306us-gaap:EmployeeStockMember2020-01-300001787306us-gaap:CommonStockMemberus-gaap:EmployeeStockMember2021-01-012021-01-010001787306us-gaap:CommonStockMember2020-01-312020-05-310001787306us-gaap:CommonStockMember2020-06-012020-11-300001787306us-gaap:EmployeeStockMember2021-01-012021-03-310001787306us-gaap:EmployeeStockMember2020-01-012020-03-310001787306us-gaap:ShareBasedCompensationAwardTrancheOneMemberus-gaap:RestrictedStockMember2016-08-012016-08-310001787306us-gaap:EmployeeStockOptionMember2021-01-012021-03-310001787306us-gaap:EmployeeStockOptionMember2020-01-012020-03-310001787306arqt:EarlyExercisedOptionsMember2021-01-012021-03-310001787306arqt:EarlyExercisedOptionsMember2020-01-012020-03-310001787306us-gaap:RestrictedStockUnitsRSUMember2021-01-012021-03-310001787306us-gaap:RestrictedStockUnitsRSUMember2020-01-012020-03-310001787306us-gaap:EmployeeStockMember2021-01-012021-03-310001787306us-gaap:EmployeeStockMember2020-01-012020-03-310001787306us-gaap:CommonStockMemberarqt:CowenAndCompanyLLCMemberus-gaap:SubsequentEventMemberarqt:AtTheMarketMember2021-05-062021-05-060001787306us-gaap:CommonStockMemberarqt:CowenAndCompanyLLCMemberus-gaap:SubsequentEventMemberarqt:AtTheMarketMember2021-05-06

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number: 001-39186
ARCUTIS BIOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
81-2974255
(I.R.S. Employer Identification Number)
3027 Townsgate Road Suite 300
Westlake Village, California
(Address of Principal Executive Offices)
91361
(Zip Code)
(805) 418-5006
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.0001 ARQTThe Nasdaq Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes No
The number of shares of the registrant’s Common Stock outstanding as of April 30, 2021 was 50,205,046.

1


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the important factors discussed in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

Summary of Risk Factors

Our business is subject to numerous risks and uncertainties, including those described in Part II Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our Class A common stock. The principal risks and uncertainties affecting our business include the following:

We are a late-stage biopharmaceutical company with a limited operating history and no products approved for commercial sale, and we have incurred significant losses since our inception. We anticipate that we will continue to incur losses for the foreseeable future, which, together with our limited operating history, makes it difficult to assess our future viability;
We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our product development, other operations or commercialization efforts;
Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our future operating results to fall below expectations;
Our estimated market opportunities for our product candidates are subject to numerous uncertainties and may prove to be inaccurate. If we have overestimated the size of our market opportunities, our future growth may be limited;
Our business is dependent on the development, regulatory approval and commercialization of our current product candidates;



Clinical drug development involves a lengthy and expensive process, with an uncertain outcome. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our product candidates;
We may be unable to obtain regulatory approval for our product candidates under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization of our product candidates and adversely impact our potential to generate revenue, our business and our results of operations;
Interim, topline or preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data;
Certain of the endpoints in our planned clinical trials rely on a subjective assessment of the effect of the product candidate in the subject by either the physician or patient, and may prove difficult to meet in patients with more severe disease, which exposes us to a variety of risks for the successful completion of our clinical trials;
Enrollment and retention of subjects in clinical trials is expensive and time-consuming and may result in additional costs and delays in our product development activities, or in the failure of such activities;
Serious adverse or unacceptable side effects may be identified during the development of our product candidates, which could prevent or delay regulatory approval and commercialization, increase our costs or necessitate the abandonment or limitation of the development of some of our product candidates;
As a company, we have never obtained marketing approval for any product candidate and we may be unable to successfully do so in a timely manner, if at all, for any of our product candidates;
Even if our lead product candidate or our other product candidates receive marketing approval, they may fail to achieve market acceptance by physicians, patients, third-party payors or others in the medical community necessary for commercial success;
If we are unable to achieve and maintain coverage and adequate levels of reimbursement for any of our product candidates for which we receive regulatory approval, or any future products we may seek to commercialize, their commercial success may be severely hindered;
We currently have limited sales, marketing or distribution capabilities and have no experience as a company in commercializing products;
We will need to increase the size of our organization, and we may experience difficulties in executing our growth strategy and managing any growth;
If we fail to attract and retain management and other key personnel, we may be unable to continue to successfully develop our current and any future product candidates, commercialize our product candidates or otherwise implement our business plan;
We currently rely on single source third-party manufacturers to manufacture preclinical and clinical supplies of our product candidates and we intend to rely on third parties to produce commercial supplies of any approved product candidate. The loss of these manufacturers, or their failure to provide us with sufficient quantities at acceptable quality levels or prices, or at all, would materially and adversely affect our business;
We rely on third parties to conduct our non-clinical studies and our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize roflumilast cream, roflumilast foam, ARQ-252, ARQ-255 or any future product candidates;
Risks related to our intellectual property could materially adversely impact our business, competitive position, financial condition, and results of operations;
Risks related to government regulation of our industry and required approvals could materially adversely impact our business, competitive position, financial condition, and results of operations; and
Future litigation could have a material adverse effect on our business and results of operations.




INDEX
Page




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCUTIS BIOTHERAPEUTICS, INC.
Condensed Balance Sheets
(In thousands, except share and par value)
March 31,December 31,
20212020
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents$288,690 $65,082 
Restricted cash1,542 1,542 
Marketable securities156,237 219,359 
Prepaid expenses and other current assets19,506 6,843 
Total current assets465,975 292,826 
Property, plant, and equipment, net2,094 2,016 
Operating lease right-of-use asset3,269 3,349 
Other assets78 78 
Total assets$471,416 $298,269 
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$3,146 $7,140 
Accrued liabilities12,168 15,462 
Total current liabilities15,314 22,602 
Operating lease liability, noncurrent5,050 4,964 
Other long-term liabilities58 82 
Total liabilities20,422 27,648 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized at March 31, 2021 and December 31, 2020; no shares issued and outstanding at March 31, 2021 and December 31, 2020;
  
Common stock, $0.0001 par value; 300,000,000 shares authorized at March 31, 2021 and December 31, 2020; 50,146,461 and 43,677,817 shares issued at March 31, 2021 and December 31, 2020, respectively; 49,887,007 and 43,338,438 shares outstanding at March 31, 2021 and December 31, 2020, respectively
5 4 
Additional paid-in capital688,939 472,569 
Accumulated other comprehensive income (loss)42 (2)
Accumulated deficit(237,992)(201,950)
Total stockholders’ equity450,994 270,621 
Total liabilities, convertible preferred stock and stockholders’ equity$471,416 $298,269 
The accompanying notes are an integral part of these unaudited condensed financial statements.
1

Table of Contents


ARCUTIS BIOTHERAPEUTICS, INC.
Condensed Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
(unaudited)
Three Months Ended March 31,
20212020
Operating expenses:
Research and development
$21,631 $25,182 
General and administrative
14,454 3,469 
Total operating expenses
36,085 28,651 
Loss from operations
(36,085)(28,651)
Other income, net43 638 
Net loss
$(36,042)$(28,013)
Other comprehensive income (loss):
Unrealized gains on marketable securities44 20 
Comprehensive loss$(35,998)$(27,993)
Per share information:
Net loss per share, basic and diluted$(0.76)$(1.15)
Weighted-average shares used in computing net loss per share, basic and diluted47,280,769 24,256,402 
The accompanying notes are an integral part of these unaudited condensed financial statements.
2

Table of Contents



ARCUTIS BIOTHERAPEUTICS, INC.
Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)
(In thousands, except share data)
(unaudited)
Convertible
Preferred Stock
Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Accumulated
Deficit
Total Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance—December 31, 201924,385,388 $166,491 2,120,853 $ $1,244 $(1)$(66,272)$(65,029)
Conversion of preferred stock into common stock upon initial public offering(24,385,388)(166,491)24,385,388 2 166,489 — — 166,491 
Issuance of shares of common stock for initial public offering, net of issuance costs of $16,040
— — 10,781,250 1 167,240 — — 167,241 
Issuance of shares of common stock upon the exercise of stock options— — 51,147 — 152 — — 152 
Vesting of founder shares subject to repurchase— — 68,931 — — — — — 
Lapse of repurchase rights related to common stock issued pursuant to early exercises— — 64,428 — 30 — — 30 
Stock-based compensation expense— — — — 990 — — 990 
Unrealized gain on marketable securities— — — — — 20 — 20 
Net loss— — — — — — (28,013)(28,013)
Balance—March 31, 2020  37,471,997 $3 $336,145 $19 $(94,285)$241,882 
Convertible
Preferred Stock
Common StockAdditional
Paid-In
Capital
Accumulated Other Comprehensive Income (Loss)Accumulated
Deficit
Total Stockholders’ Equity (Deficit)
SharesAmountSharesAmount
Balance—December 31, 2020 $ 43,338,438 $4 $472,569 $(2)$(201,950)$270,621 
Issuance of shares of common stock for public offering, net of issuance costs of $603
— — 6,325,000 1 207,489 — — 207,490 
Issuance of shares of common stock upon the exercise of stock options— — 111,282 — 325 — — 325 
Issuance of restricted stock units— — 32,362 — — — — — 
Lapse of repurchase rights related to common stock issued pursuant to early exercises— — 79,925 — 53 — — 53 
Stock-based compensation expense— — — — 8,503 — — 8,503 
Unrealized gain on marketable securities— — — — — 44 — 44 
Net loss— — — — — — (36,042)(36,042)
Balance—March 31, 2021 $ 49,887,007 $5 $688,939 $42 $(237,992)$450,994 
The accompanying notes are an integral part of these unaudited condensed financial statements.
3

Table of Contents


ARCUTIS BIOTHERAPEUTICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(unaudited)
Three Months Ended March 31,
20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss$(36,042)$(28,013)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation98 27 
Non-cash lease expense80 38 
Net amortization/accretion on marketable securities616 (192)
Stock-based compensation expense8,503 990 
Changes in operating assets and liabilities:
Prepaid expenses and other current assets(12,663)(1,097)
Accounts payable(3,880)3,412 
Accrued liabilities(3,001)3,868 
Operating lease liabilities86 (43)
Net cash used in operating activities(46,203)(21,010)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities (35,285)
Proceeds from maturities of marketable securities62,550 15,000 
Purchases of property and equipment(554)(41)
Net cash provided by (used in) investing activities61,996 (20,326)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of stock options325 247 
Proceeds from initial public offering, net of issuance costs 168,646 
Proceeds from issuance of common stock, net of issuance costs207,490  
Net cash provided by financing activities207,815 168,893 
Net increase in cash, cash equivalents, and restricted cash223,608 127,557 
Cash, cash equivalents, and restricted cash at beginning of period66,624 63,336 
Cash, cash equivalents, and restricted cash at end of period$290,232 $190,893 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Deferred financing costs included in accounts payable and accrued liabilities$ $4 
The accompanying notes are an integral part of these unaudited condensed financial statements.
4

Table of Contents



1. Organization and Description of Business
Arcutis Biotherapeutics, Inc., or the Company, is a late-stage biopharmaceutical company focused on developing and commercializing treatments for dermatological diseases with high unmet medical needs. The Company’s current portfolio is comprised of highly differentiated topical treatments with significant promise to treat immune-mediated dermatological diseases and conditions. The Company believes it has built the industry's leading platform for dermatologic product development. The Company’s strategy is to focus on validated biological targets and to use our platform and deep dermatology expertise to develop differentiated products that have the potential to address the major shortcomings of existing therapies in its targeted indications. The Company believes this strategy uniquely positions it to rapidly advance its goal of bridging the treatment innovation gap in dermatology while maximizing its probability of technical success.
On January 17, 2020, the Company's board of directors approved a 1-for-2.0007 reverse stock split of the Company’s capital stock and the Company filed a certificate of amendment to its restated certificate of incorporation to effect the split. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse split. All share and per share information included in the accompanying financial statements has been adjusted to reflect this reverse stock split.
Initial Public Offering and Follow-On Financings
On February 4, 2020, the Company closed an initial public offering (IPO) issuing and selling 10,781,250 shares of common stock at a public offering price of $17.00 per share, including 1,406,250 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company from the offering were approximately $167.2 million, after deducting underwriting discounts, commissions and offering related transaction costs. Upon the closing of the IPO, all of the outstanding shares of convertible preferred stock automatically converted into shares of common stock. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding.
On October 6, 2020, the Company completed a public offering of 4,000,000 shares of common stock at an offering price of $25.00 per share, receiving aggregate net proceeds of approximately $93.4 million after deducting the underwriting discounts, commissions and offering related transaction costs. In addition, the Company concurrently sold 1,400,000 shares of common stock in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, at a price per share equal to the public offering price, receiving net proceeds of $35.0 million.
On February 5, 2021, the Company completed a public offering of 6,325,000 shares of stock at an offering price of $35.00 per share, including 825,000 shares sold pursuant to the underwriters full exercise of their option to purchase additional shares. The aggregate net proceeds received by the Company were approximately $207.5 million, after deducting underwriting discounts, commissions, and offering related transaction costs.
Liquidity
The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $238.0 million and $202.0 million as of March 31, 2021 and December 31, 2020, respectively. The Company had cash, cash equivalents, restricted cash, and marketable securities of $446.5 million and $286.0 million as of March 31, 2021 and December 31, 2020, respectively. Prior to selling common stock in its IPO and follow-on financings, the Company had historically financed its operations primarily through the sale of its convertible preferred stock. Management expects operating losses to continue for the foreseeable future.
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. The Company will be required to raise additional capital to fund future operations. However, no assurance can be given as to whether additional needed financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, the Company may be required to curtail planned activities to significantly reduce its operating expenses. Failure to manage discretionary spending or raise additional financing, as needed, may adversely impact the Company’s ability to achieve its intended business objectives and have an adverse effect on its results of operations and future prospects.
5

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Coronavirus Outbreak
In March 2020, the World Health Organization declared a pandemic related to the global novel coronavirus disease 2019 (COVID-19) outbreak. As of May 6, 2021, the Company’s operations have not been significantly impacted by the COVID-19 pandemic. The Company is monitoring the impact COVID-19 may have on the clinical development of its product candidates, including potential delays or modifications to its ongoing and planned trials. However, the Company cannot at this time predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on its financial condition and operations, including ongoing and planned clinical trials.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s condensed financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP).
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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 accruals for research and development activities, fair value of common stock and convertible preferred stock (prior to the IPO completed in January 2020), stock-based compensation expense and income taxes. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
Segments
To date, the Company has viewed its financial information on an aggregate basis for the purposes of evaluating financial performance and allocating the Company’s resources. Accordingly, the Company has determined that it operates in one segment.
Unaudited Interim Condensed Financial Statements
The interim condensed balance sheet as of March 31, 2021, the interim condensed statements of operations and comprehensive loss, and the condensed changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2021, and 2020 are unaudited. These unaudited interim condensed 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 financial statements related to the three-month periods are also unaudited. The condensed results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any other future annual or interim period. The condensed balance sheet as of December 31, 2020 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 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, 2020.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of money market funds, commercial paper, and U.S. Treasury securities.
6

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Restricted Cash
As of March 31, 2021 and December 31, 2020, the Company held $1.5 million of restricted cash as collateral for a letter of credit related to our amended office space lease. See Note 7.
Marketable Securities
Marketable securities consist of investment grade short to intermediate-term fixed income investments that have been classified as available-for-sale and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its investments in fixed income securities at the time of purchase. Available-for-sale securities with original maturities beyond three months at the date of purchase are classified as current based on their availability for use in current operations.
Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss). Realized gains and losses as well as credit losses, if any, on marketable securities are included in other income, net. The Company evaluated the underlying credit quality and credit ratings of the issuers during the period. To date, no such credit losses have occurred or have been recorded. The cost of investments sold is based on the specific-identification method. As of March 31, 2021, there were net unrealized gains on marketable securities of $42,000, and as of December 31, 2020, there were net unrealized losses on marketable securities of $2,000. Unrealized gains and losses on marketable securities are reported as a component of accumulated other comprehensive income (loss) on the balance sheets. Realized gains or losses on investments for the three months ended March 31, 2021 were not material. There were no realized gains or losses on investments for the three months ended March 31, 2020. Interest on marketable securities is included in other income, net.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company is exposed to credit risk in the event of a default by the financial institutions holding its cash to the extent recorded on the balance sheets.
Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
Fair Value Measurement
The Company’s financial instruments, in addition to those presented in Note 3, include cash equivalents, accounts payable, and accrued liabilities. The carrying amount of cash equivalents, accounts payable, and accrued liabilities approximate their fair values due to their short maturities.
Assets and liabilities recorded at fair value on a recurring basis on the 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.
7

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets which range from three to five years. Leasehold improvements are depreciated on a straight-line basis over the shorter of their estimated useful lives or lease terms. Maintenance and repairs are expensed as incurred. The Company reviews the carrying values of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairments recognized during the three months ended March 31, 2021 and 2020.
Leases
The Company determines if an arrangement is or contains a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The classification of the Company’s leases as operating or finance leases, along with the initial measurement and recognition of the associated ROU assets and lease liabilities, is performed at the lease commencement date. The measurement of lease liabilities is based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate, based on the information available at commencement date, to determine the present value of lease payments when its leases do not provide an implicit rate. The Company uses the implicit rate when readily determinable. The ROU asset is based on the measurement of the lease liability, includes any lease payments made prior to or on lease commencement and is adjusted for lease incentives and initial direct costs incurred, as applicable. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease term. The Company considers a lease term to be the non-cancelable period that it has the right to use the underlying asset, including any periods where it is reasonably assured the Company will exercise the option to extend the contract. Periods covered by an option to extend are included in the lease term if the lessor controls the exercise of that option.
The Company’s lease agreements includes lease and non-lease components and the Company has elected to not separate such components for all classes of assets. Further, the Company elected the short-term lease exception policy, permitting it to not apply the recognition requirements of this standard to leases with terms of 12 months or less (short-term leases) for all classes of assets.
Preclinical and Clinical Accruals and Costs
The Company records accrued liabilities for estimated costs of research and development activities conducted by third-party service providers, which include the conduct of preclinical studies, clinical trials and contract manufacturing activities. These costs are a significant component of the Company’s research and development expenses. The Company accrues for these costs based on factors such as estimates of the work completed and in accordance with agreements established with its third-party service providers under the service agreements. The Company makes significant judgments and estimates in determining the accrued liabilities balance in each reporting period. As actual costs become known, the Company adjusts its accrued liabilities. For the three months ended March 31, 2021 and 2020, the Company has not experienced any material differences between accrued costs and actual costs incurred.
Convertible Preferred Stock
Prior to its IPO, the Company classified its outstanding convertible preferred stock outside of stockholders’ equity (deficit) on its balance sheets as the requirements of triggering a deemed liquidation event, as defined within its amended and restated certificate of incorporation, were not entirely within the Company’s control. In the event of such a deemed liquidation event, the proceeds from the event were to be distributed in accordance with the liquidation preferences, provided that the holders of convertible preferred stock had not converted their shares into common stock. The Company recorded the issuance of convertible preferred stock at the issuance price less related issuance costs. The Company did not adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty as to whether or when a deemed liquidation event may have occurred. In connection with the IPO in February 2020, the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock.
8

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Research and Development
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, license fees, stock-based compensation expense, materials, supplies, and the cost of services provided by outside contractors. All costs associated with research and development are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods are received or services are rendered. Such payments are evaluated for current or long-term classification based on when they will be realized.
The Company has entered into, and may continue to enter into, license agreements to access and utilize certain technology. In each case, the Company evaluates if the license agreement results in the acquisition of an asset or a business. To date none of the Company’s license agreements have been considered an acquisition of a business. For asset acquisitions, the upfront payments to acquire such licenses, as well as any future milestone payments made before product approval that do not meet the definition of a derivative, are immediately recognized as research and development expense when paid or become payable, provided there is no alternative future use of the rights in other research and development projects.
Stock-Based Compensation
The Company accounts for share-based payments at fair value. The fair value of stock options is measured using the Black-Scholes option-pricing model. For share-based awards that vest subject to the satisfaction of a service requirement, the fair value measurement date for such awards is the date of grant and the expense is recognized on a straight-line basis, over the expected vesting period. For share-based awards that vest subject to a performance condition, the Company will recognize compensation cost for awards if and when the Company concludes that it is probable that the awards with a performance condition will be achieved on an accelerated attribution method. The Company accounts for forfeitures as they occur.
Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance.
The Company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based on the merits of the position. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties incurred in relation to the unrecognized tax benefits.
The United States Congress enacted the American Rescue Plan Act on March 10, 2021, Families First Coronavirus Response Act (FFCR Act) on March 18, 2020 and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on March 27, 2020. The American Rescue Plan Act is a follow-up to the CARES Act, which continue the emergency economic stimulus package and includes spending and tax breaks to strengthen the U.S. economy and fund a nationwide effort to curtail the effect of COVID-19. The American Rescue Plan Act, FFCR Act and CARES Act include numerous tax-related provisions including modifications to the limitations on business interest expense and net operating losses (NOLs), certain refundable employee retention credits, as well as a payment delay of employer payroll taxes in 2020 after the date of enactment. On June 29, 2020, the California State Assembly Bill 85 (Trailer Bill) was enacted which suspends the use of California NOL deductions and certain tax credits, including research and development credits, for the 2020, 2021, and 2022 tax years. The Company does not expect the American Rescue Plan Act FFCR Act, CARES Act or Trailer Bill to have a material impact on the Company’s financial statements.
9

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Variable Interest Entities
The Company reviews agreements it enters into with third-party entities, pursuant to which the Company may have a variable interest in the entity, in order to determine if the entity is a variable interest entity (VIE). If the entity is a VIE, the Company assesses whether or not it is the primary beneficiary of that entity. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (i) the power to direct the economically significant activities of the entity and (ii) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If the Company determines it is the primary beneficiary of a VIE, it consolidates that VIE into the Company’s financial statements. The Company’s determination about whether it should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event. The Company currently does not consolidate any VIEs.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive shares of common stock. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive. Shares of common stock subject to repurchase are excluded from the weighted-average shares.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
Recently Adopted Accounting Pronouncements
There have been no new accounting pronouncements issued or effective that are expected to have a material impact on the Company's condensed financial statements.
3. Fair Value Measurements
The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
March 31, 2021
Level 1Level 2Level 3Total
Assets:
Money market funds(1)
$288,690 $ $ $288,690 
Commercial paper
 10,990  10,990 
U.S. Treasury securities145,247  145,247 
Total assets$433,937$10,990 $ $444,927 

10

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
December 31, 2020
Level 1
Level 2
Level 3
Total
Assets:
Money market funds(1)
$65,082$$$65,082 
Commercial paper45,518 45,518 
U.S. Treasury securities173,841 173,841 
Total assets$238,923$45,518$ $284,441 
______________
(1)This balance includes cash requirements settled on a nightly basis.
Commercial paper, money market funds, and U.S. Treasury securities are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.
The following table summarizes the estimated value of the Company’s cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands):
March 31, 2021
Amortized
cost
Unrealized
gains
Unrealized
losses
Estimated
fair value
Cash and cash equivalents:
Money market funds(1)
$288,690 $— $— $288,690 
Total cash and cash equivalents$288,690 $— $— $288,690 
Marketable securities:
Commercial paper10,990  10,990 
U.S. Treasury securities145,205 42  145,247 
Total marketable securities$156,195 $42 $ $156,237 
______________
(1)This balance includes cash requirements settled on a nightly basis.

December 31, 2020
Amortized
cost
Unrealized
gains
Unrealized
losses
Estimated
fair value
Cash and cash equivalents:
Money market funds(1)
$65,082 $— $— $65,082 
Total cash and cash equivalents$65,082 $— $— $65,082 
Marketable securities:
Commercial paper$45,518 $ $ $45,518 
U.S. Treasury securities173,843 7 (9)173,841 
Total marketable securities$219,361 $7 $(9)$219,359 
______________
(1)This balance includes cash requirements settled on a nightly basis.

Realized gains or losses on investments for the three months ended March 31, 2021 and 2020 were not material. As of December 31, 2020, unrealized losses on marketable securities were not material, and accordingly, no allowance for credit losses were recorded. There were no unrealized losses on marketable securities as of March 31, 2021. As of March 31, 2021 and December 31, 2020, all securities have a maturity of one year or less and all securities with gross unrealized losses have been in a continuous loss position for less than one year.
11

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
4. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
March 31, 2021December 31, 2020
Prepaid clinical trial costs$14,105 $4,865 
Prepaid insurance2,675 249 
Tax credits 577 510 
Other prepaid expenses and current assets2,149 1,219 
Total prepaid expenses and other current assets$19,506 $6,843 
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
March 31, 2021December 31, 2020
Clinical trial accruals$7,519 $9,754 
Accrued compensation1,713 4,434 
Early exercise liability, current
148 176 
Accrued expenses and other current liabilities
2,788 1,098 
Total accrued liabilities
$12,168 $15,462 

5. Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
Useful life (in years)March 31, 2021December 31, 2020
Computer hardware3$384 $286 
Furniture and fixtures5248 230 
Software370  
Construction in process 298 
Leasehold improvements1,568 1,280 
Property and equipment, gross2,270 2,094 
Less accumulated depreciation(176)(78)
Property and equipment, net$2,094 $2,016 
Leasehold improvements are depreciated over the term of the lease. Depreciation expense was $98,000 and $27,000 for the three months ended March 31, 2021 and 2020, respectively.
12

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
6. License Agreements
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. The Company subsequently paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product, which was recorded in research and development expense. The Company has agreed to make additional cash payments to AstraZeneca of up to an aggregate of $12.5 million upon the achievement of specified regulatory approval milestones with respect to the AZ-Licensed Products and payments up to an additional aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones. With respect to any AZ-Licensed Products the Company commercializes under the AstraZeneca License Agreement, it will pay AstraZeneca a low to high single-digit percentage royalty rate on the Company’s, its affiliates’ and its sublicensees’ net sales of such AZ-Licensed Products, subject to specified reductions, until, as determined on an AZ-Licensed Product-by-AZ-Licensed Product and country-by-country basis, the later of the date of the expiration of the last-to-expire AstraZeneca-licensed patent right containing a valid claim in such country and ten years from the first commercial sale of such AZ-Licensed Product in such country.
There were no payments made or due in connection with AZ-Licensed Products for the three months ended March 31, 2021 and 2020.
Hengrui Exclusive Option and License Agreement
In January 2018, the Company entered into an exclusive option and license agreement, or the Hengrui License Agreement, with Jiangsu Hengrui Medicine Co., Ltd. (Hengrui), whereby Hengrui granted the Company an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a Janus kinase type 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Japan, Canada, and the European Union (including for clarity the United Kingdom). The Company made a $0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement, which was recorded as research and development expense. In December 2019, the Company exercised its exclusive option under the agreement, for which it made a $1.5 million cash payment, which was recorded in research and development expense, and also contemporaneously amended the agreement to expand the territory to additionally include Canada. In addition, the Company has agreed to make cash payments of up to an aggregate of $20.5 million upon achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $200.0 million in sales-based milestones based on certain aggregate annual net sales volumes with respect to a licensed product.
13

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
With respect to any products the Company commercializes under the Hengrui License Agreement, it will pay tiered royalties to Hengrui on net sales of each licensed product by the Company, or its affiliates, or its sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions. The Company is obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis. Additionally, the Company is obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income it receives from sublicensees of its rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance.
There were no payments made or due in connection with Hengrui for the three months ended March 31, 2021 and 2020.
Hawkeye Collaboration Agreement
In June 2019, the Company entered into a collaboration agreement, or Hawkeye Agreement, with Hawkeye Therapeutics, Inc. (Hawkeye), a related party with common ownership, for the development of one or more new applications of roflumilast. The Hawkeye Agreement grants Hawkeye an exclusive license to certain intellectual property developed under the agreement as it relates to the applications.
Contemporaneously with the execution of the Hawkeye Agreement, the Company entered into a stock purchase agreement, purchasing 995,000 shares of Hawkeye’s common stock at $0.0001 per share, representing 19.9% of the outstanding common stock of Hawkeye. In the event that Hawkeye issues shares of Series A preferred stock with proceeds over $5.0 million, Hawkeye is required to issue to the Company a number of fully-paid fully-vested shares of common stock determined by dividing (i) $2,000,000 by (ii) an amount equal to the cash price per share for Series A preferred stock. Other than the potential issuance of this common stock, there are no upfront payments, milestones, or royalties pursuant to the Hawkeye Agreement. The Company determined that Hawkeye is a VIE for which consolidation is not required as it is not the primary beneficiary.
7. Commitments and Contingencies
Operating Lease
The Company leases a facility in Westlake Village, California under an operating lease that commenced in February 2019. This lease was amended in April 2020 in order to relocate to a new expanded space comprising 22,643 square feet. At the time of the amendment, the Company reassessed the lease term of the original space in accordance with the option to terminate if leasing additional space in the same property. In connection with the reduction of the lease term for the original space, the Company reduced the ROU asset and lease liability balance by $123,000.
The Company recognized the ROU asset and lease liability for the new space on May 1, 2020, which was determined to be the lease commencement date, or the date on which the new space was made available to the Company for purposes of planning and constructing the leasehold improvements. The lease payment term for the new space began on December 30, 2020, which was 15 days after the leasehold improvements were substantially complete. The lease payments terminate 91 months thereafter, with a renewal option for a term of five years. The Company will have a one-time option to cancel the lease after month 67. The renewal and one-time cancellation options have not been considered in the determination of the ROU asset or lease liability as the Company did not consider it reasonably certain it would exercise these options.
14

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
The lease is subject to fixed rate escalation increases with an initial base rent of $76,000 per month and includes rent free periods aggregating approximately one year. As a result, the Company recognizes rent expense on a straight-line basis for the full amount of the commitment including the minimum rent increases over the life of the lease and the free rent period. The amended lease agreement provided for a leasehold improvement allowance up to $1.25 million. It also required the Company to have an available letter of credit of $1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met. Accordingly, in November 2020, the Company entered into a letter of credit for $1.5 million, which it secured with a restricted cash account in the same amount. The restricted cash will be reduced by $308,000 on the first, second, third, and fourth anniversary and by $45,000 on the fifth anniversary from when the lease payment term began on December 30, 2020, with no further reductions thereafter.
In association with commencement of this new lease, the Company recorded lease liabilities and ROU assets of $3.6 million on its condensed balance sheet as of June 30, 2020. Since the Company was reasonably certain to incur costs equal to or exceeding the leasehold improvement allowance of $1.25 million, the allowance was treated as a lease incentive that was payable to the Company at the lease commencement date. Accordingly, the leasehold improvement allowance was included in the measurement of the consideration in the contract at commencement, and was recognized as a reduction in the ROU asset and lease liability. Upon completion of the leasehold improvements in December 2020, the $1.25 million allowance was reclassified from the lease liability to property and equipment on the condensed balance sheet as of December 31, 2020. The Company capitalized $320,000 of additional leasehold improvements, in excess of the $1.25 million allowance, which were also reflected in property and equipment as of December 31, 2020. All leasehold improvements will be depreciated over the remaining term of the lease.
The minimum annual rental payments of the Company’s operating lease liability as of March 31, 2021 are as follows (in thousands):
Amounts
2021 (April through December)$114 
2022781 
2023965 
2024995 
20251,024 
Thereafter2,794 
Total minimum lease payments$6,673 
Less: Amounts representing interest(1,623)
Present value of future minimum lease payments$5,050 
Operating lease liability, noncurrent5,050 
Total operating lease liability$5,050 
Straight-line rent expense recognized for operating leases was $175,000 and $43,000 for the three months ended March 31, 2021 and 2020, respectively. There were no significant variable lease payments, including non-lease components such as common area maintenance fees, recognized as rent expense for operating leases for the three months ended March 31, 2021 and 2020.

The following information represents supplemental disclosure for the statement of cash flows related to the Company’s operating lease (in thousands):
Three Months Ended March 31,
20212020
Cash flows from operating activities
Cash paid for amounts included in the measurement of lease liabilities$ $47 
15

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
The following summarizes additional information related to the operating lease:
March 31, 2021
Weighted-average remaining lease term (in years)7.3
Weighted-average discount rate7.0 %
Indemnification
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless, and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by the provisions of the Company’s Bylaws and the Delaware General Corporation Law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes any potential loss exposure under these indemnification agreements in excess of applicable insurance coverage is minimal.
8. Convertible Preferred Stock and Stockholders’ Equity
Convertible Preferred Stock
In connection with the Company's IPO in February 2020, all of the Company’s outstanding shares of convertible preferred stock were automatically converted into 24,385,388 shares of common stock.
Common Stock
The holders of the Company’s common stock have one vote for each share of common stock. Common stockholders are entitled to dividends when, as, and if declared by the board of directors. The holders have no preemptive or other subscription rights and there are no redemption or sinking fund provisions with respect to such shares. As of March 31, 2021, no dividends had been declared by the board of directors.
The Company reserved the following shares of common stock for issuance as follows:
March 31, 2021December 31, 2020
Options issued and outstanding4,540,255 3,655,945 
Common stock awards available for grant under employee benefit plans3,509,044 2,501,329 
Restricted stock units outstanding310,068 162,930 
Total common stock reserved8,359,367 6,320,204 
Authorized Share Capital
On February 4, 2020, the Company’s certificate of incorporation was amended and restated to provide for 300,000,000 authorized shares of common stock with a par value of $0.0001 per share and 10,000,000 authorized shares of preferred stock with a par value of $0.0001 per share. There were no shares of preferred stock outstanding as of March 31, 2021 and December 31, 2020.
16

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
9. Stock-Based Compensation
In January 2020, the Company’s board of directors approved the 2020 Equity Incentive Plan, (2020 Plan), which became effective January 30, 2020 in connection with the IPO. The 2020 Plan serves as the successor incentive award plan to the Company’s 2017 Equity Incentive Plan (2017 Plan) and has 2,134,000 shares of common stock available for issuance pursuant to a variety of stock-based compensation awards, including stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock-based awards, plus 1,550,150 shares of common stock that were reserved for issuance pursuant to future awards under the 2017 Plan at the time the 2020 Plan became effective, plus shares represented by awards outstanding under the 2017 Plan that are forfeited or lapsed unexercised and which following the effective date of the 2020 Plan are not issued under the 2017 Plan. In addition, the 2020 Plan reserve will increase on January 1 of each year through 2030, by an amount equal to the lesser of (a) four percent of the shares of stock outstanding (on an as converted basis) on the day immediately prior to the date of increase and (b) such smaller number of shares of stock as determined by our board of directors; provided, however, that no more than 11,000,000 shares of stock may be issued upon the exercise of incentive stock options. Accordingly, on January 1, 2021, the plan reserve increased by 1,747,112 shares. As of March 31, 2021, the Company had 2,755,454 shares available for future grant under the 2020 Plan.
The 2020 Plan provides for the Company to sell or issue common stock or restricted common stock, or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, members of the board of directors and consultants of the Company under terms and provisions established by the board of directors. Under the terms of the 2020 Plan, options may be granted at an exercise price not less than fair market value. The Company generally grants stock-based awards with service conditions. Options granted typically vest over a four-year period but may be granted with different vesting terms.
Following the Company’s IPO and in connection with the effectiveness of the Company’s 2020 Plan, the 2017 Plan terminated and no further awards will be granted under that plan. However, all outstanding awards under the 2017 Plan will continue to be governed by their existing terms.
Stock Option Activity
The following summarizes option activity (in thousands, except share amounts):
Number of
Options
Weighted-
Average
Exercise
Price
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
Balance—December 31, 20203,655,945 $12.09 8.78$59,274 
Granted1,024,400 $31.51 
Exercised(112,365)$2.96 
Forfeited(27,725)$28.65 
Balance—March 31, 20214,540,255 $16.60 8.63$59,383 
Exercisable—March 31, 2021(1)
2,099,037 $8.57 7.87$42,849 
______________
(1)Options exercisable includes early exercisable options.
The aggregate intrinsic value is calculated as the difference between the exercise price of the options and the fair value of the Company’s common stock as of March 31, 2021. As of December 31, 2020, prior to the Company's IPO, the estimated fair value of the Company's common stock was determined by the board of directors.
The intrinsic value of options exercised for the three months ended March 31, 2021 was $3.3 million.
The total grant-date fair value of the options vested during the three months ended March 31, 2021 was $4.9 million. The weighted-average grant-date fair value of employee options granted during the three months ended March 31, 2021 was $21.74.
17

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Restricted Stock Unit Activity
The following table summarizes information regarding our RSUs:

Number of UnitsWeighted-Average
Grant Date Fair Value
Balance—December 31, 2020162,930 $27.26 
Granted181,900 $32.00 
Vested(32,362)$27.61 
Forfeited(2,400)$32.44 
Unvested Balance—March 31, 2021310,068 $29.96 
The grant date fair value of an RSU equals the closing price of our common stock on the grant date. RSUs generally vest equally over four years. There were no RSU grants prior to January 1, 2020.
Stock-Based Compensation Expense
Stock-based compensation expense included in the condensed statements of operations and comprehensive loss was as follows (in thousands):
Three Months Ended March 31,
20212020
Research and development
$1,520 $416 
General and administrative
6,983 574 
Total stock-based compensation expense
$8,503 $990 
As of March 31, 2021, there was $41.2 million of total unrecognized compensation cost related to unvested options that are expected to vest, which is expected to be recognized over a weighted-average period of 3.5 years. As of March 31, 2021, there was $8.5 million of total unrecognized compensation cost related to RSUs that is expected to vest, which is expected to be recognized over a weighted-average period of 3.7 years.
In March 2021, in connection with the retirement of the former Chief Financial Officer, the Company modified the terms of this individual’s historical stock awards. As a result of the modifications, the Company recognized approximately $5.3 million of incremental stock compensation expense during the period, which is included in general and administrative expenses.
In determining the fair value of the stock options granted, the Company uses the Black-Scholes option-pricing model and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment.
Fair value of common stock—For options granted prior to IPO in the year ended December 31, 2019, given the absence of a public trading market, the Company’s board of directors with input from management considered numerous objective and subjective factors to determine the fair value of common stock. The factors included, but were not limited to: (i) third-party valuations of the Company’s common stock; (ii) the Company’s stage of development; (iii) the status of research and development efforts; (iv) the rights, preferences, and privileges of the Company’s convertible preferred stock relative to those of the Company’s common stock; (v) the Company’s operating results and financial condition, including the Company’s levels of available capital resources; (vi) equity market conditions affecting comparable public companies; (vii) general U.S. market conditions; and (viii) the lack of marketability of the Company’s common stock. For options granted after IPO, the Company uses its closing stock price as reported on Nasdaq on the grant date for the fair value of its stock.
18

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company used the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term.
Expected Volatility—The Company does not yet have sufficient trading history for its common stock to solely use its own historical volatility. Therefore, the expected volatility was estimated based on a combination of its own historical common stock volatility as well as the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle and area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.
Dividend Yield—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.
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:
Three Months Ended March 31, 2021Year Ended
December 31, 2020
Expected term (in years)
5.86.1
5.56.8
Expected volatility
84.5 – 85.2%
78.4 – 80.8%
Risk-free interest rate
0.61.0%
0.31.4%
Dividend yield
%%
Early Exercise of Employee Options
The terms of the 2017 and 2020 Plans permit certain option holders to exercise options before their options are vested, subject to certain limitations. Upon early exercise, the awards become subject to a restricted stock agreement. The shares of restricted stock granted upon early exercise of the options are subject to the same vesting provisions in the original stock option awards. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment, at the price paid by the purchaser. While such shares have been issued, they are not considered outstanding for accounting purposes until they vest and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature. The liability is reclassified into common stock and additional paid-in capital as the shares vest and the repurchase right lapses. Accordingly, the Company has recorded the unvested portion of the exercise proceeds of $206,000 and $258,000 as a liability from the early exercise in the accompanying balance sheets as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, there were $148,000 and $176,000 recorded in accrued liabilities, respectively, and $58,000 and $82,000 recorded in other long-term liabilities, respectively related to shares that were subject to repurchase.
19

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
Founder Awards
In August 2016, the Company issued 1,187,738 shares of restricted common stock to founders, of which 1,102,903 shares would vest under a service condition, and 84,835 shares would vest under a performance condition. The shares were issued under the terms of the respective restricted stock purchase agreements, or the Stock Purchase Agreement, and unvested shares were subject to repurchase by the Company at the original purchase price per share upon the holder’s termination of his relationship with the Company. The restricted shares were not considered outstanding for accounting purposes until they vested and are therefore excluded from shares used in determining loss per share until the repurchase right lapses and the shares are no longer subject to the repurchase feature. One-fourth of the 1,102,903 shares of restricted common stock were vested on the first-anniversary date and the remaining 827,177 shares vested on a monthly basis thereafter. All shares of restricted stock subject to the award were vested as of June 30, 2020.
2020 Employee Stock Purchase Plan
The Company adopted the 2020 Employee Stock Purchase Plan, or the ESPP, which became effective on January 30, 2020 in connection with the IPO. The ESPP is designed to allow the Company’s eligible employees to purchase shares of the Company’s common stock, at semi-annual intervals, with their accumulated payroll deductions. Under the ESPP, participants are offered the option to purchase shares of the Company’s common stock at a discount during a series of successive offering periods. The option purchase price will be the lower of 85% of the closing trading price per share of the Company’s common stock on the first trading date of an offering period in which a participant is enrolled or 85% of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period.
The ESPP is intended to qualify under Section 423 of the U.S. Internal Revenue Service Code of 1986, as amended. The maximum number of the Company’s common stock which will be authorized for sale under the ESPP is equal to the sum of (a) 351,000 shares of common stock and (b) an annual increase on the first day of each year beginning in 2021 and ending in 2030, equal to the lesser of (i) 1% of the shares of common stock outstanding (on an as converted basis) on the last day of the immediately preceding fiscal year and (ii) such number of shares of common stock as determined by the Company’s board of directors; provided, however, no more than 5,265,000 shares of the Company’s common stock may be issued under the ESPP. Accordingly, on January 1, 2021, the ESPP reserve increased by 436,778 shares.
The Company commenced an offering period on January 31, 2020, which ended on May 31, 2020, and resulted in 19,862 shares of stock being issued under the ESPP. The Company also commenced an offering period on June 1, 2020, which ended on November 30, 2020, and resulted in 14,326 shares of stock being issued under the ESPP. In addition, the Company commenced an offering period on December 1, 2020, which will end on May 31, 2021. Stock-based compensation expense related to the ESPP was $117,000 and $66,000 for the three months ended March 31, 2021 and 2020, respectively.
10. Net Loss Per Share
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 March 31,
20212020
Stock options to purchase common stock4,540,255 3,061,521 
Early exercised options subject to future vesting259,460 613,627 
RSU's subject to future vesting310,068 198,992 
ESPP shares subject to future issuance3,733 11,392 
Total5,113,516 3,885,532 

20

Table of Contents
ARCUTIS BIOTHERAPEUTICS, INC.
Notes to Condensed Financial Statements
(unaudited)
11. Subsequent Event
On May 6, 2021, the Company entered into a sales agreement (Sales Agreement) with Cowen and Company, LLC (Cowen), under which the Company may from time to time issue and sell shares of its common stock through at-the-market (ATM) offerings for an aggregate offering price of up to $100.0 million. Cowen will act as the Company's sales agent for the ATM program. The issuance and sale of shares of common stock by the Company pursuant to the Sales Agreement are deemed an “at-the-market” offering under the Securities Act of 1933, as amended. Cowen is entitled to compensation for its services equal to 3% of the gross proceeds of any shares of common stock sold through Cowen under the Sales Agreement. The ATM program has been registered under the Securities Act pursuant to the Company's shelf registration statement on Form S-3, as amended (Registration No. 333-252612), as supplemented by the Prospectus Supplement dated May 6, 2021 relating to the sale of shares of our common stock.
21

Table of Contents
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 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, 2020 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, 2020, which has been filed with the Securities and Exchange Commission. 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 this Quarterly Report on Form 10-Q, 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 late-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 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. Our strategy is to focus on validated biological targets, and to use our platform and deep dermatology expertise to develop 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 progress towards our goal of bridging the treatment innovation gap in dermatology, while maximizing our probability of technical success and financial resources.
Our lead product candidate, roflumilast cream, has successfully completed pivotal Phase 3 clinical trials in plaque psoriasis. We are currently preparing a New Drug Application (NDA), with a submission to the U.S. Food and Drug Administration (FDA) expected in the second half of 2021. Roflumilast cream is a highly potent and selective phosphodiesterase type 4 (PDE4) inhibitor, an established biological target in dermatology, with multiple PDE4 inhibitors approved by the FDA for dermatological conditions. We are developing roflumilast cream for the treatment of plaque psoriasis, including psoriasis in intertriginous regions such as the groin, axillae, and inframammary areas, as well as atopic dermatitis. We have also successfully completed a long-term safety study of roflumilast cream in plaque psoriasis patients.
Additionally, we have completed a Phase 2 proof of concept study of roflumilast cream in atopic dermatitis, and recently initiated Phase 3 clinical trials, with topline data expected in the second half of 2022.
We are also developing a topical foam formulation of roflumilast, and have successfully completed Phase 2 studies in both seborrheic dermatitis and scalp psoriasis. In seborrheic dermatitis, we had a successful End of Phase 2 meeting with the FDA and plan to initiate a single pivotal Phase 3 clinical trial in the second or third quarter of 2021, with topline data expected in the second or third quarter of 2022. In scalp psoriasis, we also had a successful End of Phase 2 meeting with the FDA and plan to initiate a single pivotal Phase 3 clinical trial in the second half of 2021, with topline data expected in the second half of 2022.
We are developing ARQ-252, a potent and highly selective topical JAK1 inhibitor, for the treatment of chronic hand eczema and vitiligo. Our recently completed Phase 1/2b study of ARQ-252 for the treatment of chronic hand eczema did not meet its primary endpoint. Further analyses of the data are underway.
We also recently initiated a Phase 2 proof of concept study of ARQ-252 for the treatment of vitiligo, with topline results expected in the second half of 2023. Additionally, we have formulation and preclinical efforts underway for ARQ-255, an alternative topical formulation of ARQ-252 designed to reach deeper into the skin in order to potentially treat alopecia areata.
22

Table of Contents
Since our inception in 2016, we have invested a significant portion of our efforts and financial resources in clinical development activities. We have not generated any revenue from product sales and have funded our operations primarily with the net proceeds from our IPO completed in January 2020 and with the net proceeds from our follow-on equity offerings in October 2020 and February 2021, respectively, as well as with $162.5 million in net cash proceeds from private placements of our convertible preferred stock prior to IPO. On February 4, 2020, we closed our IPO of 10,781,250 shares of common stock at an offering price of $17.00 per share, which included the exercise in full by the underwriters of their option to purchase up to 1,406,250 additional shares of common stock. Our net proceeds, after deducting underwriting discounts, commissions and offering related transaction costs, were $167.2 million. In addition, on October 6, 2020, we closed our public offering of 4,000,000 shares of common stock and concurrent private placement of 1,400,000 shares of common stock, both at a price of $25.00 per share, receiving an aggregate of $128.4 million in net proceeds after deducting the underwriting discounts, commissions, and offering related transaction costs. Also, on February 5, 2021, we closed our public offering of 6,325,000 shares of common stock at a price of $35.00 per share, including 825,000 shares sold pursuant to the underwriters' full exercise of their option to purchase additional shares, receiving an aggregate of $207.5 million in net proceeds, after deducting underwriting discounts, commissions, and offering related transaction costs. See Note 1 to the unaudited condensed financial statements for additional information.
We have incurred net losses in each year since inception, including net losses of $36.0 million and $28.0 million for the three months ended March 31, 2021, and 2020, respectively. As of March 31, 2021, we had an accumulated deficit of $238.0 million and cash, cash equivalents, restricted cash, and marketable securities of $446.5 million.
We expect to continue to incur losses for the foreseeable future and expect to incur increased expenses as we advance our product candidates through clinical trials and regulatory submissions. We do not expect to generate revenue from product sales unless, and until, we obtain regulatory approval or clearance from the FDA or other foreign regulatory authorities for our product candidates. If we obtain regulatory approval or clearance for our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. In addition, we expect that our expenses will increase substantially as we continue preclinical studies and clinical trials for, and research and development of, our product candidates and maintain, expand, and protect our intellectual property portfolio. As a result, we will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings or other sources, such as future potential collaboration agreements. Our 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 financial statements for additional information. Based on our current planned operations, we expect that our current cash, cash equivalents, and marketable securities will be sufficient to fund our operations well into 2023.
We rely on third parties in the conduct of our preclinical 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 preclinical and clinical trial materials, as well as the commercial supply of our products. In addition, we do not yet have a sales organization or fully developed commercial infrastructure. Accordingly, we expect to incur significant expenses to fully develop a sales organization or commercial infrastructure in advance of generating any product sales.
COVID-19 Update
In March 2020, the World Health Organization declared a pandemic related to the COVID-19 outbreak. COVID-19 has placed strains on the providers of healthcare services, including the sites where we conduct our clinical trials. These strains have resulted in some clinical sites slowing or halting enrollment in clinical trials and restricting the on-site monitoring of clinical trials. We follow FDA guidance on clinical trial conduct during the COVID-19 pandemic, including the remote monitoring of clinical data. We are monitoring the impact COVID-19 may have on the clinical development of our product candidates, including potential delays or modifications to ongoing and planned trials. Thus far, we have seen limited impact on our clinical trials, including some disruptions in screening, enrollment and monitoring; however at this time, we do not expect delays to previously disclosed clinical timelines, including those for roflumilast cream, roflumilast foam, and ARQ-252. We cannot, at this time, predict the specific extent, duration, or full impact that the COVID-19 outbreak will have on our ongoing and planned clinical trials and other business operations.
23

Table of Contents
There have been no disruptions in our supply chain of drug manufacturers necessary to conduct our clinical trials and, given our drug inventories, we believe that we will be able to supply the drug needs of our ongoing clinical studies.
In alignment with public health guidance designed to slow the spread of COVID-19, we implemented a remote work plan for all employees as of mid-March 2020. We developed a return-to-work protocol, and as the pandemic conditions improved in the southern California region, we began a phased return to in-person work in the first quarter of 2021. We may need to undertake additional actions that could impact our operations as required by applicable laws or regulations, or which we determine to be in the best interests of our employees.
License Agreements
AstraZeneca License Agreement
In July 2018, we entered into the AstraZeneca License Agreement with AstraZeneca, granting us 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, we have sole responsibility for development, regulatory, and commercialization activities for the AZ-Licensed Products in the Dermatology Field, at our expense, and we 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.
We paid AstraZeneca an upfront non-refundable cash payment of $1.0 million and issued 484,388 shares of our Series B Preferred stock, valued at $3.0 million on the date of the AstraZeneca License Agreement. We subsequently paid AstraZeneca the first milestone cash payment of $2.0 million upon the completion of a Phase 2b study of roflumilast cream in plaque psoriasis in August 2019 for the achievement of positive Phase 2 data for an AZ-Licensed Product. We have agreed to make additional cash payments to AstraZeneca of up to an aggregate of $12.5 million upon the achievement of specific regulatory approval milestones with respect to the AZ-Licensed Products and payments up to an additional aggregate amount of $15.0 million upon the achievement of certain aggregate worldwide net sales milestones. With respect to any AZ-Licensed Products we commercialize under the AstraZeneca License Agreement, we will pay AstraZeneca a low to high single-digit percentage royalty rate on our, our affiliates’ and our sublicensees’ net sales of such AZ-Licensed Products, until, as determined on an AZ-Licensed Product-by-AZ-Licensed Product and country-by-country basis, the later of the date of the expiration of the last-to-expire AstraZeneca-licensed patent right containing a valid claim in such country and ten years from the first commercial sale of such AZ-Licensed Product in such country. See Note 6 to the unaudited condensed financial statements for additional information.
24

Table of Contents
Hengrui Exclusive Option and License Agreement
In January 2018, we entered into the Hengrui License Agreement, with Hengrui, whereby Hengrui granted us an exclusive option to obtain certain exclusive rights to research, develop, and commercialize products containing the compound designated by Hengrui as SHR0302, a JAK 1 inhibitor, in topical formulations for the treatment of skin diseases, disorders, and conditions in the United States, Canada, Japan, and the European Union (including for clarity the United Kingdom). We made a $0.4 million upfront non-refundable cash payment to Hengrui upon execution of the Hengrui Option and License Agreement. In December 2019, we exercised our exclusive option under the agreement, for which we made a $1.5 million cash payment, and also contemporaneously amended the agreement to expand the territory to additionally include Canada. In addition, we have agreed to make cash payments of up to an aggregate of $20.5 million upon our achievement of specified clinical development and regulatory approval milestones with respect to the licensed products and cash payments of up to an additional aggregate of $200.0 million in sales-based milestones based on achieving certain aggregate annual net sales volumes with respect to a licensed product. With respect to any products we commercialize under the Hengrui License Agreement, we will pay tiered royalties to Hengrui on net sales of each licensed product by us, or our affiliates, or our sublicensees, ranging from mid single-digit to sub-teen percentage rates based on tiered annual net sales bands subject to specified reductions. We are obligated to pay royalties until the later of (1) expiration of the last valid claim of the licensed patent rights covering such licensed product in such country and (2) the expiration of regulatory exclusivity for the relevant licensed product in the relevant country, on a licensed product-by-licensed product and country-by-country basis. Additionally, we are obligated to pay Hengrui a specified percentage, ranging from the low-thirties to the sub-teens, of certain non-royalty sublicensing income we receive from sublicensees of our rights to the licensed products, such percentage decreasing as the development stage of the licensed products advance.
The agreement continues in effect until the expiration of our obligation to pay royalties as described above, unless earlier terminated in accordance with the following: (1) by either party upon written notice for the other party’s material breach or insolvency event if such party fails to cure such breach or the insolvency event is not dismissed within specified time periods; and (2) by us for convenience upon 90 days prior written notice to Hengrui and having discussed and consulted any potential cause or concern with Hengrui in good faith. See Note 6 to the unaudited condensed financial statements for additional information.
Components of Our Results of Operations
Operating Expenses
Research and Development Expenses
Since our inception, we have focused significant resources on our research and development activities, including conducting preclinical 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, preclinical 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 allocatable on a program specific basis.
We expect to continue to incur substantial research and development expenses in the future as we develop our product candidates. In particular, we expect to incur substantial research and development expenses for the Phase 3 trials of roflumilast cream for atopic dermatitis, the Phase 3 trials of roflumilast foam for seborrheic dermatitis and scalp psoriasis, ARQ-252 for hand eczema and vitiligo, and ARQ-255 for alopecia areata.
25

Table of Contents
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 to acquire such licenses, 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 roflumilast cream, roflumilast foam, ARQ-252 and ARQ-255 or any future product candidates. This is due 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.
General and Administrative Expenses
Our general and administrative expenses consist primarily of salaries and related costs, including payroll taxes, benefits, stock-based compensation, and travel. Other general and administrative expenses include legal costs of pursuing patent protection of our intellectual property, insurance, and professional services fees for marketing, auditing, tax, and general legal services. We expect our general and administrative expenses to continue to increase in the future as we expand our operating activities and prepare for potential commercialization of our product candidates, increase our headcount, and support our operations as a public company; including increased expenses related to legal, accounting, insurance, regulatory, and tax-related services associated with maintaining compliance with exchange listing and Securities and Exchange Commission (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.
26

Table of Contents
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
The following table sets forth our results of operations for the periods indicated:
Three Months Ended March 31,Change
20212020$%
(unaudited)
(in thousands)
Operating expenses:
Research and development
$21,631 $25,182 $(3,551)(14)%
General and administrative
14,454 3,469 10,985 317 %
Total operating expenses
$36,085 $28,651 $7,434 26 %
Loss from operations
(36,085)(28,651)(7,434)26 %
Other income, net
43 638 (595)(93)%
Net loss$(36,042)$(28,013)$(8,029)29 %
Research and Development Expenses
Three Months Ended March 31,Change
20212020$%
(unaudited)
(in thousands)
Direct external costs:
Topical roflumilast program$9,787 $20,585 $(10,798)(52)%
Topical JAK inhibitor program3,651 1,405 2,246 160 %
Other early stage programs177 — 177 *
Indirect costs:
Compensation and personnel-related5,109 2,267 2,842 125 %
Other2,907 925 1,982 214 %
Total research and development expense$21,631 $25,182 $(3,551)(14)%
______________
(*)Change % is not applicable.
Research and development expenses decreased by $3.6 million, or 14%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was due to a decrease in direct costs related to the topical roflumilast program of $10.8 million, offset by an increase in direct costs related to the topical JAK inhibitor program (ARQ-252 and ARQ-255) of $2.2 million, an increase in compensation and personnel-related costs of $2.8 million, and an increase of $2.0 million in other costs. The decreased topical roflumilast program costs relate primarily to the completion of the Phase 3 studies of roflumilast cream for plaque psoriasis and the Phase 2 studies of roflumilast foam in seborrheic dermatitis and scalp psoriasis, as well as a decrease in manufacturing costs. This decrease was partially offset by the costs related to our Phase 3 studies of roflumilast cream in atopic dermatitis. The increased topical JAK inhibitor program costs relate primarily to our Phase 2 studies of ARQ-252 in hand eczema and vitiligo, as well as increased product development expenses. The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to an increase in headcount. The increase in other costs relate primarily to an increase in consulting activity and medical affairs spending.
27

Table of Contents
General and Administrative Expenses
General and administrative expenses increased by $11.0 million, or 317%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily due to an increase in compensation and personnel-related expenses of $7.7 million, and an increase in professional services of $2.6 million. The increase in compensation and personnel-related expenses, which includes stock-based compensation, was primarily due to the recognition of $5.3 million of incremental stock-based compensation expense as a result of modification to the vesting schedule and exercise term of previously-granted awards in connection with the retirement of our former Chief Financial Officer, as well as an increase in headcount. The increase in professional services was mainly due to an increase in consulting activity and marketing expenses primarily related to roflumilast.
Other Income, Net
Other income, net decreased by $595,000, or 93%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was due to a lower yield on our investment portfolio.
Liquidity, Capital Resources, and Requirements
Sources of Liquidity
We have incurred operating losses since our inception and have an accumulated deficit as a result of ongoing efforts to develop our product candidates, including conducting preclinical and clinical trials and providing general and administrative support for these operations. As of March 31, 2021, we had cash, cash equivalents, restricted cash, and marketable securities of $446.5 million, and an accumulated deficit of $238.0 million. We anticipate that operating losses and net cash used in operating activities will increase over the next several years as we further develop roflumilast cream, roflumilast foam, ARQ-252, and ARQ-255; move into later and more costly stages of product development, develop new product candidates, hire personnel, and prepare for regulatory submissions and the commercialization of our product candidates.
We have historically financed our operations primarily through private placements of preferred stock, as well as our IPO completed in January 2020 and our follow-on financing in October 2020 and February 2021. We will continue to be dependent upon equity, debt financing, collaborations, or other forms of capital at least until we are able to generate positive cash flows from our operations. On May 6, 2021, we entered into a sales agreement, or Sales Agreement, with Cowen, to sell shares of our common stock, from time to time, with aggregate gross sales proceeds of up to $100.0 million through an at-the-market equity offering program under which Cowen acts as sales agent, or the ATM Offering Program. During the three months ended March 31, 2021, we did not issue or sell any shares of our common stock through our ATM Offering Program.
Cash Flows
The following table sets forth our cash flows for the periods indicated:
Three Months Ended March 31,
20212020
(unaudited)
(in thousands)
Cash used in operating activities$(46,203)$(21,010)
Cash provided by (used in) investing activities61,996 (20,326)
Cash provided by financing activities207,815 168,893 
Net increase in cash and cash equivalents$223,608 $127,557 
Net Cash Used in Operating Activities
During the three months ended March 31, 2021, net cash used in operating activities was $46.2 million, which consisted of a net loss of $36.0 million and a change in net operating assets and liabilities of $19.5 million offset by net non-cash charges of $9.3 million. The change in net operating assets and liabilities was primarily due to an increase of $12.7 million in prepaid expenses and other current assets due to an increase in prepaid clinical trials and a decrease of $6.9 million in accounts payable and accrued liabilities due to the timing of payments to contract research organizations and payment of employee bonuses accrued for at December 31, 2020. The net non-cash charges were primarily related to stock-based compensation expense of $8.5 million.
28

Table of Contents
During the three months ended March 31, 2020, net cash used in operating activities was $21.0 million, which consisted of a net loss of $28.0 million, offset by a change in net operating assets and liabilities of $6.1 million and net non-cash charges of $0.9 million. The change in net operating assets and liabilities was due to an increase of $7.3 million in accounts payable and accrued liabilities due to our overall growth, increased research and development spending and timing of payments, partially offset by an increase of $1.1 million in prepaid expenses and other current assets for premiums paid on insurance policies and other advances made for clinical trial costs. The net non-cash charges were primarily related to stock-based compensation expense of $1.0 million.
Net Cash Provided by (Used in) Investing Activities
During the three months ended March 31, 2021, net cash provided by investing activities was $62.0 million, which was comprised primarily of proceeds from the maturities of marketable securities of $62.6 million, partially offset by the purchases of property and equipment of $0.6 million.
During the three months ended March 31, 2020, net cash used in investing activities was $20.3 million, which was comprised primarily of purchases of marketable securities of $35.3 million, partially offset by proceeds from the maturities of marketable securities of $15.0 million.
Net Cash Provided by Financing Activities
During the three months ended March 31, 2021, net cash provided by financing activities was $207.8 million, which was comprised primarily of the net cash proceeds received from the follow-on financing in February 2021 of $207.5 million.
During the three months ended March 31, 2020, net cash provided by financing activities was $168.9 million, which was comprised primarily of the net cash proceeds received from the IPO of $168.6 million.
Funding Requirements
We have historically incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $238.0 million as of March 31, 2021. We had cash, cash equivalents, and marketable securities of $444.9 million as of March 31, 2021. Based on our current planned operations, we expect that our current cash, cash equivalents, and marketable securities will be sufficient to fund our operations well into 2023. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations.
We will need to raise substantial additional capital to fund our operations through the sale of our equity securities, incurring 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 reductions in staff and delaying, scaling back, or stopping certain research and development programs. 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.
We have based our projections of operating capital 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. Our future funding requirements will depend on many factors, including, but not limited to:
the scope, progress, results, and costs of researching and developing our lead product candidates or any future product candidates, and conducting preclinical studies and clinical trials, in particular our planned or ongoing clinical studies of roflumilast cream in plaque psoriasis and atopic dermatitis, roflumilast foam in seborrheic dermatitis and scalp psoriasis, ARQ-252 in hand eczema and vitiligo, and our formulation and preclinical efforts for ARQ-255 for alopecia areata.
suspensions or delays in the enrollment or changes to the number of patients we decide to enroll in our ongoing clinical trials as a result of the COVID-19 pandemic;
the timing of, and the costs involved in, obtaining regulatory approvals for our lead product candidate or our other product candidates;
29

Table of Contents
the number and characteristics of any additional product candidates we develop or acquire;
the cost of manufacturing our lead product candidates 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 if our lead product candidates or any future product candidates are approved for sale, including marketing, sales, and distribution costs;
the cost of building a sales force in anticipation of product commercialization;
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 or Hengrui, upon the achievement of predetermined milestones;
any product liability or other lawsuits related to our products;
the expenses needed to attract and retain skilled personnel;
the costs associated with being a public company;
the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims, and the outcome of this and any other future patent litigation we may be involved in; and
the timing, receipt, and amount of sales of any future approved products, if any.
Contractual Obligations and Contingent Liabilities
The following summarizes our significant contractual obligations as of March 31, 2021:
TotalLess than 1 Year1-3 Years3-5 YearsMore than 5 Years
(in thousands)
Operating leases$6,673 $114 $1,746 $2,019 $2,794 
Total obligations$6,673 $114 $1,746 $2,019 $2,794 
In April 2020, we amended our lease agreement for our facility in Westlake Village, California to relocate to a new expanded space including 22,643 square feet. The lease payment term for the new space began on December 30, 2020 and will terminate 91 months thereafter, with a renewal option term of five years. We have a one-time option to cancel the lease after month 67.
The lease is subject to fixed rate escalation increases with an initial base rent of $76,000 per month and includes rent free periods aggregating approximately one year. The amended lease agreement required that we deliver a letter of credit to the landlord of $1.5 million upon occupying the space, which is allowed to be reduced throughout the lease period as rent obligations are met. Accordingly, in November 2020, we entered into a letter of credit for $1.5 million, which is secured with a restricted cash account in the same amount.
Indemnification
In the normal course of business, we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. Our exposure under these agreements is unknown because it involves claims that may be made against us in the future, but have not yet been made. To date, we have not paid any claims or been required to defend any action related to our indemnification obligations. However, we may record charges in the future as a result of these indemnification obligations.
In accordance with our certificate of incorporation and bylaws, we have indemnification obligations to our officers and directors for specified events or occurrences, subject to some limits, while they are serving at our request in such capacities. There have been no claims to date, and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.
30

Table of Contents
Critical Accounting Policies and Use of Estimates
The preparation of our condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. A summary of our critical accounting policies is presented in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020. There were no material changes to our critical accounting policies during the three months ended March 31, 2021.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed financial statements.
Emerging Growth Company Status
We are an emerging growth company as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we are (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We early adopted ASU No. 016-01, Financial Instruments—Overall (Topic 825)—Recognition and Measurement of Financial Assets and Financial Liabilities, ASU 2016-09, Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share Based Payment Accounting, ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, ASU No. 2016-02, Leases, ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, and ASU No. 2019-12, Income Taxes (Topic 740), as the JOBS Act does not preclude an emerging growth company from early adopting a new or revised accounting standard earlier than the time such standard applies to private companies. We expect to use the extended transition period for any other new or revised accounting standards during the period in which we remain an emerging growth company.
We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of the completion of our IPO. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate sensitivities. As of March 31, 2021, we had cash and cash equivalents of $288.7 million, restricted cash of $1.5 million, and marketable securities of $156.2 million; which consist of bank deposits, money market funds, commercial paper, and government securities. The primary objective of our investment activities is to preserve capital to fund our operations. We also seek to maximize income from our investments without assuming significant risk. Because our investments are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant, and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio. We had no debt outstanding as of March 31, 2021.
Item 4. CONTROLS AND PROCEDURES

31


Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives of ensuring that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. There is no assurance that our disclosure controls and procedures will operate effectively under all circumstances.
Management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021. The term “disclosure controls and procedures,” as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time