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Item 2. Management’s Discussion and Analysis

2020-08-10 compared with 2020-05-08 · 80 added, 89 removed, 85 unchanged (67% of the section changed)

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The following is a discussion of the financial condition and results of operations of Arcturus Therapeutics Holdings Inc.

for the three-month period ended March 31, 2020.

for the three and six-month periods ended June 30, 2020.

Unless otherwise specified herein, references to the “Company,” “Arcturus,” “we,” “our” and “us” mean Arcturus Therapeutics Holdings Inc.

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We qualify all of our forward-looking statements by these cautionary statements.

We are a clinical-stage messenger RNA medicines company focused on the development of infectious disease vaccines utilizing our Self-Transcribing and Replicating RNA (“STARR”) technology and significant opportunities in liver and respiratory rare diseases.

In addition to our internal mRNA platform, our proprietary lipid nanoparticle delivery system, LUNAR, may enable multiple nucleic acid medicines.

The genetic medicines industry is constantly struggling to identify non-viral delivery solutions for large RNA molecules to different cell types.

Our LUNAR delivery technology is lipid mediated – and non-viral.

LUNAR is versatile, compatible with various types of RNA -- and has been shown to deliver large RNA to different cell types including liver hepatocytes, liver stellate cells, muscle cells (myocytes), and lung cells (including bronchial epithelial cells).

Arcturus is a messenger RNA medicines company focused on significant opportunities within liver and respiratory rare diseases, and the development of infectious disease vaccines utilizing our Self-Transcribing and Replicating RNA (“STARR”) technology.

In addition to our internal messenger RNA (“mRNA”) platform, our proprietary lipid nanoparticle delivery system, LUNAR, has the potential to enable multiple nucleic acid medicines.

Our key proprietary technology has the potential to address the major hurdles in RNA development, namely the effective and safe delivery of RNA therapeutics to disease-relevant target tissues.

We believe that the versatility of our platform to target multiple tissues, its compatibility with various nucleic acid therapeutics, and our expertise in developing scalable manufacturing processes put us in a good position to deliver on the next generation of nucleic medicines.

Our activities since inception have consisted principally of performing research and development activities, general and administrative activities and raising capital to fund those efforts.

Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before we achieve sustainable revenues and profit from operations.

Our company is subject to many of the risks common with an early-stage biotechnology company, including, but not limited to, dependence on key personnel, protection of proprietary technology and the ability to obtain future capital to fund ongoing operations and clinical development.

As of June 30, 2020, we had an accumulated deficit of $91.7 million.

Results of Operations

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The following table summarizes our total revenues for the periods indicated (in thousands):

Three Months Ended March 31,

Three Months Ended June 30,

(Dollars in thousands)

Collaboration revenue

Collaboration revenue decreased by $1.7 million during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 .

Collaboration revenue de creased by $ 7.8 million during the three months ended June 3 0 , 20 20 as compared to the three months ended June 30 , 201 9 .

The de c rease in c ollaboration revenue relates to de creased revenue of $ 3.2 million from reimbursements from CureVac associated with the OTC collaboration that ended in the second quarter of 2019.

The decrease also relates to decreased revenue of $3.1 million from sublicens e revenue from Synthetic Genomics as we recognized a large payment in the second quarter of 2019.

The remaining $1.

5 million decrease was primarily due to a decrease in revenue recognition related to the Ultragenyx agreement as we recorded a large amount of upfront payment amortization upon the execution of the Ultragenyx Third Amendment during the second quarter of 2019.

Six Months Ended June 30,

(Dollars in thousands)

Collaboration revenue

Collaboration revenue decreased by $9.5 million during the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.

The decrease in collaboration revenue primarily relates to decreased revenue of $4.8 million from reimbursements from CureVac associated with the OTC collaboration that ended in the second quarter of 2019.

The remaining $0.1 million decrease was due to decreases in revenue recognition for research and development funding from collaboration partners.

The decrease also relates to a $3.3 million decrease in sublicense revenue from Synthetic Genomics, as we recognized a large payment from Synthetic Genomics in the second quarter of 2019.

The decrease also relates to a reduction of $2.0 million revenue recognized related to the Ultragenyx Agreement, as we recorded a large amount of upfront payment amortization upon the execution of the Ultragenyx Third Amendment during the second quarter of 2019 and also recognized fewer research and development expense reimbursements related to the Ultragenyx Agreement during the first half of 2020.

The decrease was primarily offset by higher research and development expense reimbursements recognized in 2020 related to other collaboration agreements including Janssen and Takeda.

Our operating expenses consist of research and development and general and administrative expenses.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

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The following table presents our total research and development expenses by category:

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

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LUNAR-CF, net

LUNAR-COVID, net

LUNAR-COV19, net

Discovery technologies

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Total development expenses

Personnel related expenses

Personnel related expenses, net

Facilities and equipment expenses

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expenses, net

Greater than 100%

Research and Development Expenses, net

Our development expenses consist primarily of external manufacturing costs, in-vivo research studies performed by contract research organizations, clinical and regulatory consultants, and laboratory supplies related to conducting research and development activities.

The IND for our LUNAR-OTC (ARCT-810) program was deemed allowed to proceed by the FDA in April 2020.

During the first quarter of 2019, we began ramping up the LUNAR-OTC program in preparation for IND submission.

As our IND application was submitted near the end of the first quarter of 2020, the program costs remained relatively consistent for the three months ended March 31, 2020 as compared to 2019.

Lunar-CF expenses increased by $0.1 million, from $0.2 million for the three months ended March 31, 2019 to $0.3 million for the three months ended March 31, 2020.

The current quarter amount was partially offset with funds awarded by the CFF.

The increase in LUNAR-CF expenses during 2020 was due primarily to increased research and development cost incurred in association with the amendment to the CFF Agreement executed in July 2019, and we expect that our development efforts and associated costs will increase over the next year as the LUNAR-CF program moves toward expected IND submission in 2021.

The LUNAR-COVID program was initiated in the first quarter of 2020 and generated $0.1 million of expenses.

The program is expected to enter human clinical trials during the third quarter of 2020.

This amount was partially offset with funds awarded by the Economic Development Board of Singapore.

We expect that our development efforts and our portion of the costs to increase in the foreseeable future as we advance this program.

The IND for our LUNAR-OTC (ARCT-810) program was accepted by the FDA in April 2020.

During the first half of 2019, we began ramping up the LUNAR-OTC program in preparation for IND submission.

As we initiated clinical trials early in the second quarter of 2020, the program costs have decreased by $0.9 million and $1.0 million for the three and six months ended June 30, 2020 as compared to 2019.

L UNAR -CF expenses increased by $0.7 million and $0.

9 million during the three and six months ended June 30, 2020 , respectively, as compared to 2019.

The current year amount was partially offset with funds awarded by the Cystic Fibrosis Foundation (“ CFF ”) .

The increase in LUNAR-CF expenses during 2020 was du e primarily to increased research and development cost incurred in association with the amendment to the CFF Agreement executed in July 2019, and we expect that our development efforts and associated costs will increase over the next year as the LUNAR-CF p rogram moves toward expected IND submission in 2021.

In March 2020, we signed a contract for approximately $10.1 with Singapore Economic Development board that will fund a portion of the costs incurred in our LUNAR-COV19 program.

We expect that the program costs will continue to increase as the clinical trial progresses.

The program costs were $2.4 million and $2.6 million for the three and six months ended June 30, 2020, respectively.

There were no comparable costs in 2019.

Discovery technologies represents our efforts to expand our product pipeline and are expected to continually increase over the near future.

However, during the three months ended March 31, 2020 as compared to 2019, our costs decreased by $0.1 million, as we focused our efforts on the advancement of our LUNAR-OTC (ARCT-810) and LUNAR-COVID programs.

However, during the three and six months ended June 30, 2020 as compared to 2019, our discovery technologies costs decreased by $1.6 million and $1.7 million, respectively, as we focused our efforts on the advancement of our LUNAR-OTC (ARCT-810) and LUNAR-COV19 programs.

Within our platform development expenses, our partnered discovery expenses with our current partners are expected to fluctuate based on the needs of our collaboration partners.

During the three months ended March 31, 2020 as compared to the prior period in 2019, expenses increased by $0.1 million as a result of the stage of each program in which our collaboration partners are currently working.

Personnel related expenses for the three months ended March 31, 2020 increased by $0.1 million as compared to 2019.

This increase was associated with increased headcount necessary to advance our external pipeline and platform efforts.

During the quarter ended March 31, 2020, the expense amount was offset by $0.8 million of funds received from CFF and $0.2 million of funds received from the Singapore Economic Development Board.

We expect to continue to expand our headcount as our research and development activities expand.

Facilities and equipment expenses increased by $0.3 million during the three months ended March 31, 2020 as compared to 20 19 .

During the three and six months ended June 30, 2020 as compared to the prior period in 2019, partnered discovery expenses were relatively flat as a result of the stage of each program in which our collaboration partners are currently working.

Personnel related expenses for the three and six months ended June 30, 2020 decreased by $0.3 million and $0.1 million, respectively, as compared to 2019 due to more of our research and development expenses being funded by grant money this year.

During the quarter ended June 30, 2020, personnel related expenses were offset by $0.3 million of funds received from CFF and $0.6 million of funds received from the Singapore Economic Development Board.

We expect to continue to expand our headcount as required to meet our future business plan and expect personnel related expenses to increase going forward.

Facilities and equipment expenses increased by $0.3 million and $0.6 million during the three and six months ended June 30, 2020, respectively, as compared to 2019.

The increase resulted primarily from higher rent and related costs associated with our second facility lease that we entered into in February 2020.

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General and administrative expenses consist primarily of salaries and related benefits for our executive, administrative and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses.

General and administrative expenses for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 increased by $0.7 million.

The increase resulted primarily from personnel expense due to increased headcount.

Finance (expense) income, net

Three Months Ended March 31,

General and administrative expenses for the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 increased by $1.0 million and $1.6 million, respectively.

The increases resulted primarily from personnel expense due to increased headcount.

Finance expense, net

Three Months Ended June 30,

Six Months Ended June 30,

(Dollars in thousands)

Finance expense, net:

Interest income

Interest expense

Interest income is generated on cash and cash equivalents, and decreased for the three months ended March 31, 2020 as compared to the prior year period as a result of reduced investments.

Interest expense was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank, and increased for the three months ended March 31, 2020 as compared to the prior year period as a result of a $5.0 million increase in our long-term debt balance .

Interest income is generated on cash and cash equivalents and decreased for the three months ended June 30, 2020 as compared to the prior year period as a result of reduced investments as well as lower interest rates on investments.

Interest expense was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank and increased for the six months ended June 30, 2020 as compared to 2019 as a result of a $5.0 million increase in our long-term debt balance.

Interest expense for the three months ended June 30, 2020 remained relatively flat as compared to the prior year period as the aforementioned increase was offset by a reduced prime rate in the current period.

Off-balance sheet arrangements

Through March 31, 2020, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Through June 30, 2020, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual obligations

See Note 5 for a summary of changes in the long-term debt position of the Company as of March 31, 2020.

As of March 31, 2020, we have non-cancelable contractual obligations totaling approximately $7.4 million.

See Note 5 in our Condensed Consolidated Financial Statements for a summary of changes in the long-term debt position of the Company as of June 30, 2020.

As of June 30, 2020, we have non-cancelable contractual obligations totaling approximately $6.9 million.

Liquidity and Capital Resources

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Our ability to transition to become profitable in the near future is dependent on the success of our COVID-19 vaccine, and in later years mRNA drug or vaccine candidates for OTC deficiency, cystic fibrosis and other possible mRNA drugs or vaccine candidates that are currently in the initial phase of development.

Historically, our major sources of cash have been comprised of proceeds from collaboration partners, various public and private offerings of our common stock, option and warrant exercises, and interest income.

From inception through March 31, 2020, we raised approximately $210.4 million in gross proceeds from various public and private offerings of our common stock, debt issuances, collaboration agreements, and the merger with Alcobra .

As of March 31, 2020, we had approximately $59.6 million in cash, restricted cash and cash equivalents.

During April 2020, the Company raised additional capital of approximately $75.5 million through an underwritten public offering.

Historically, our major sources of cash have been comprised of proceeds from collaboration partners, various public and private offerings of our common stock, bank debt, option and warrant exercises, and interest income.

From inception through June 30, 2020, we raised approximately $288.6 million in gross proceeds from various public and private offerings of our common stock, debt issuances, collaboration agreements, and the merger with Alcobra .

As of June 30, 2020, we had approximately $136.2 million in cash, restricted cash and cash equivalents.

Subsequently in July 2020, the Company raised, to date, additional capital of approximately $173.0 million through an underwritten public offering.

In addition, the Company has borrowed $15.0 million through its facility with Western Alliance Bank.

The following table shows a summary of our cash flows for the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended March 31,

The following table shows a summary of our cash flows for the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30,

(Dollars in thousands)

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Financing activities

Net decrease in cash, cash equivalents and restricted cash

Net increase in cash and restricted cash

Operating Activities

Our primary use of cash is to fund operating expenses, which consist mainly of research and development expenditures and general and administrative expenditures.

We have incurred significant losses which have been partially offset by cash received through our collaboration agreements, equity offerings and 2017 merger.

We have incurred significant losses which have been partially offset by cash received through our collaboration agreements, equity offerings, debt financing and 2017 merger.

Cash received under the collaboration agreements can vary from year to year depending on the terms of the agreements and work performed.

These changes in cash flows primarily relate to the timing of cash receipts for upfront payments, reimbursable expenses and achievement of milestones under these collaborative agreements.

Net cash used in operating activities was $11.9 million on a net loss of $9.8 million for the three months ended March 31, 2020, compared to net cash used of $5.4 million on a net loss of $6.9 million for the three months ended March 31, 2019.

Adjustments for non-cash charges, including share-based compensation, depreciation and amortization, interest expense and loss from equity-method investment were $1.4 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively.

Changes in working capital resulted in adjustments to operating net cash outflows of $3.5 million and inflows of $0.4 million for the three months ended March 31, 2020 and 2019, respectively, and were primarily driven by decreases in accounts payable and deferred revenue as well as increases in prepaid expenses and other assets partly offset by increases in accrued expenses for the three months ended March 31, 2020.

Net cash used in operating activities was $20.4 million on a net loss of $20.0 million for the six months ended June 30, 2020, compared to net cash provided of $3.9 million on a net loss of $7.6 million for the six months ended June 30, 2019.

Adjustments for non-cash charges, including share-based compensation, depreciation and amortization, interest expense and loss from equity-method investment were $3.3 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively.

Changes in working capital resulted in adjustments to operating net cash outflows of $3.6 million for the six months ended June 30, 2020, and were driven by increases in accounts receivable and prepaid expenses as well as decreases in accounts payable and deferred revenue offset by an increase in accrued expenses.

Changes in working capital resulted in adjustments to operating net cash inflows of $9.6 million for the six months ended June 30, 2019, and were driven by increases in deferred revenue and accounts payable offset by increases in accounts receivable and prepaid expenses as well as a decrease in accrued liabilities.

Investing Activities

Net cash used in investing activities of $0.1 million for each of the three months ended March 31, 2020 and 2019, respectively, reflected cash used to purchase property and equipment.

Net cash used in investing activities of $0.6 million and $0.3 million for the six months ended June 30, 2020 and 2019, respectively, reflected cash used to purchase property and equipment

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2020 reflected proceeds from the exercise of stock options of $0.1 million.

No cash was provided or used by financing activities for the three months ended March 31, 2019.

Net cash provided by financing activities for the six months ended June 30, 2020 reflected proceeds of $9.6 million from the issuance of common stock to Ultragenyx upon exercise of their option, proceeds from the issuance of common stock of $75.3 million, and proceeds from the exercise of stock options of $0.8 million.

Net cash provided by financing activities for the six months ended June 30, 2019 reflected proceeds from the issuance of common stock of $15.5 million.

Funding Requirements

We anticipate that we will continue to generate annual net losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin commercialization of our products.

As a result, we will require additional capital to fund our operations in order to support our long-term plans.

We continue to incur significant expenses and will require additional capital to develop, test and manufacture our LUNAR-COV19 vaccine candidate and to continue clinical development of LUNAR-OTC;

to advance our LUNAR-CF and LUNAR-CV preclinical programs into clinical development;

to fund early research and development of novel and proprietary RNA medicines;

and for general corporate and working capital purposes.

The Company intends to seek additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners or through other sources of financing.

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the extent to which we acquire or invest in businesses, products or technologies.

During April 2020, the Company raised additional capital of approximately $75.5 million through an underwritten public offering.

In addition, the Company has borrowed $15 million through its facility with Western Alliance Bank.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with GAAP.

As such, we make certain estimates, judgements and assumptions that we believe are reasonable, based upon information available to us.

These judgements involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our results of operations and financial condition.

We describe our significant accounting policies more fully in Note 2 to our consolidated financial statements for the year ended December 31, 2019.

The following are our significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results.

Revenue Recognition

Research and development revenue under collaborative agreements

We recognize collaboration revenue from several collaboration agreements.

Our collaboration agreements typically contain promised goods and services, including technology licenses or options to obtain technology licenses, research and development services, and manufacturing services.

Upon entering into a collaboration agreement, we are required to make the following judgements:

Identifying the performance obligations contained in the agreement

Our assessment of what constitutes a separate performance obligation requires us to apply judgement.

Specifically, we are required to identify which goods and services we are required to provide under the contract are distinct, if any.

Determining the transaction price, including any variable consideration

To determine the transaction price, we review the amount of consideration we are eligible to earn under the agreement.

We do not typically include any payments we may receive in the future in our initial transaction price since the payments are typically not probable as they are contingent upon certain future events that are uncertain or out of our control.

We are required to reassess the total transaction price at each reporting period to determine if we should include additional payments that have become probable in the transaction price.

Allocating the transaction price to each of our performance obligations

If we were to allocate the transaction price to more than one performance obligation, we would make estimates of the relative stand-alone selling price of each performance obligation, as it is not typical for us to sell our goods or services on a stand-alone basis.

The estimate of the relative stand-alone selling price would require us to make significant judgements.

To date, we have not entered into a collaboration agreement with more than one performance obligation.

The collaboration revenue we recognize each period is comprised of several types of revenue, including amortization from upfront payments, milestone payments, option exclusivity fees and other services.

Each of these types of revenue require us to make various judgements and estimates.

Amortization from Upfront Payments

For certain agreements, we recognize revenue from the amortization of upfront payments as we perform research and development services.

We use an input method to estimate the amount of revenue to recognize each period.

This method requires us to make estimates of the total costs we expect to incur in order to complete our promised research and development services or the total length of time it will take us to complete our promised research and development services.

If we change our estimates, we may have to adjust our revenue.

Milestone Payments

When recognizing revenue related to milestone payments, we typically judge and estimate whether the milestone payment is probable (discussed in detail above under “Determining the transaction price, including any variable consideration”).

Quantitative and Qualitati ve Disclosures About Market Risk.

Our primary exposure to market risk is interest income and expense sensitivity and foreign currency exchange rates.

Interest income and expense sensitivity is affected by changes in the general level of interest rates in the United States as well as foreign exchange market risks relate to the Grant from the Singapore Economic Development Board.

When deemed appropriate, we may manage our exposure to foreign exchange market risks through the use of derivative financial instruments.

We may utilize such derivative financial instruments for hedging or risk management purposes.

D ue to the nature of our cash and cash equivalents and our evaluation of the potential impact of foreign currency exchange rates, we believe that we are not currently subject to any material market risk exposure.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis