Arcturus Therapeutics Holdings Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a discussion of the financial condition and results of operations of Arcturus Therapeutics Holdings Inc. for the three and nine-month periods ended September 30, 2020. Unless otherwise specified herein, references to the “Company,” “Arcturus,” “we,” “our” and “us” mean Arcturus Therapeutics Holdings Inc. and its consolidated subsidiaries from and after the effective time of the Redomiciliation and, prior to that time, to our predecessor, Arcturus Therapeutics Ltd. You should read the following discussion and analysis together with the interim condensed consolidated financial statements and related notes included elsewhere herein. For additional information relating to our management’s discussion and analysis of financial conditions and results of operations, please see our Annual Report on Form 10‑K for the year ended December 31, 2019 (the “2019 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (the “Commission”) on March 16, 2020. Unless otherwise defined herein, capitalized words and expressions used herein shall have the same meanings ascribed to them in the 2019 Annual Report. This Quarterly Report on Form 10-Q, and the documents incorporated by reference herein may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1.A, “Risk Factors” in this quarterly report. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our current expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results, though not all forward-looking statements necessarily contain these identifying words. Such statements may include, but are not limited to, statements concerning the following: • the initiation, cost, timing, progress and results of, and our expected ability to undertake certain activities and accomplish certain goals with respect to, our research and development activities, preclinical studies and clinical trials; • our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate; • our ability to obtain and deploy funding for our operations; • our ability to continue as a going concern; • our plans to research, develop and commercialize our product candidates; • our strategic alliance partners’ election to pursue development and commercialization of any programs or product candidates that are subject to our collaboration and license agreements with such partners; • our ability to attract collaborators with relevant development, regulatory and commercialization expertise; • future activities to be undertaken by our strategic alliance partners, collaborators and other third parties; • our ability to obtain and maintain intellectual property protection for our product candidates; • the size and growth potential of the markets for our product candidates, and our ability to serve those markets; • our ability to successfully commercialize, and our expectations regarding future therapeutic and commercial potential with respect to, our product candidates; • the rate and degree of market acceptance of our product candidates; • our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators; • regulatory developments in the United States and foreign countries; • our ability to attract and retain experienced and seasoned scientific and management professionals to lead the Company; • the performance of our third-party suppliers and manufacturers; • the success of competing therapies that are or may become available; and • the accuracy of our estimates regarding future expenses, future revenues, capital requirements and need for additional financing. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. In addition, historic results of scientific research, preclinical and clinical trials do not guarantee that future research or trials will suggest the same conclusions, nor that historic results referred to herein will be interpreted the same in light of additional research, preclinical and 17 clinical trial results. The forward-looking statements contained in this quarterly report are subject to risks and uncertainties, including those discussed in our other filings with the Commission. Readers are cautioned not to place undue r eliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. Overview 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. In August 2020, we announced the dosing of all subjects in the first cohort of the Phase 1/2 clinical study of our LUNAR-COV19 vaccine candidate. The study is being conducted with CTI Clinical Trial and Consulting Services, a global contract research organization, and in collaboration with Duke-NUS Medical School in Singapore. Additionally, in October 2020, we announced the completion of the first three dose escalation cohorts in our ongoing Phase 1 study of ARCT-810, our messenger RNA-based therapeutic candidate for Ornithine Transcarbamylase (“OTC”) deficiency. Our activities since inception have consisted principally of 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. As of September 30, 2020, we had an accumulated deficit of $112.7 million. Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Report and our audited financial statements and related notes for the year ended December 31, 2019. Our historical results of operations and the year-to-year comparisons of our results of operations that follow are not necessarily indicative of future results. Collaboration Revenue We enter into arrangements with pharmaceutical and biotechnology partners that may contain upfront payments, license fees for research and development arrangements, research and development funding, milestone payments, option exercise fees and royalties on future sales. The following tables summarize our total revenues for the periods indicated (in thousands): Three Months Ended September 30, 2019 to 2020 (Dollars in thousands) 2020 2019 $ change % change Collaboration revenue $ 2,333 $ 3,318 $ (985 ) -29.7 % Collaboration revenue decreased by $1.0 million during the three months ended September 30, 2020 as compared to the three months ended September 30, 2019. The decrease in collaboration revenue primarily relates to $0.8 million of decreased revenue from reduced reimbursements associated with the CureVac AG (“CureVac”) co-development agreement that terminated in the second quarter of 2019. Nine Months Ended September 30, 2019 to 2020 (Dollars in thousands) 2020 2019 $ change % change Collaboration revenue $ 7,301 $ 17,821 $ (10,520 ) -59.0 % Collaboration revenue decreased by $10.5 million during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. The decrease in collaboration revenue primarily relates to $5.6 million of decreased revenue from reduced reimbursements associated with the CureVac co-development agreement that terminated in the second quarter of 2019. The decrease further relates to a decrease in sublicense revenue from Synthetic Genomics as we recognized sublicense revenue of $3.3 million during the second quarter of 2019. The remaining decrease relates to a reduction of $2.1 million in revenue recognized related 18 to the Ultragenyx A greement , 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 A greement during the first nine months of 20 20 . The decrease was slight ly offset by higher research and development expense reimbursements recognized in 2020 related to other collaboration agreements including with Janssen and Takeda. Our operating expenses consist of research and development and general and administrative expenses. Three Months Ended September 30, 2019 to 2020 Nine Months Ended September 30, 2019 to 2020 (Dollars in thousands) 2020 2019 $ change % change 2020 2019 $ change % change Operating expenses: Research and development, net $ 17,699 $ 7,053 $ 10,646 * $ 33,560 $ 21,646 $ 11,914 55.0 % General and administrative 5,572 3,881 1,691 43.6 % 14,183 10,871 3,312 30.5 % Total $ 23,271 $ 10,934 $ 12,337 * $ 47,743 $ 32,517 $ 15,226 46.8 % * Greater than 100% Research and Development Expenses, net The following table presents our total research and development expenses by category: Three Months Ended September 30, 2019 to 2020 Nine Months Ended September 30, 2019 to 2020 (Dollars in thousands) 2020 2019 $ change % change 2020 2019 $ change % change External pipeline development expenses: LUNAR-OTC (ARCT-810) $ 5,444 $ 3,337 $ 2,107 63.1 % $ 10,318 $ 9,167 $ 1,151 12.6 % LUNAR-CF, net 837 147 690 * 2,141 598 1,543 * LUNAR-COV19, net 6,247 — 6,247 * 8,806 — 8,806 * Discovery technologies 816 787 29 3.7 % 1,051 2,716 (1,665 ) -61.3 % External platform development expenses: Partnered discovery technologies 470 348 122 35.1 % 1,250 1,039 211 20.3 % Total development expenses 13,814 4,619 9,195 * 23,566 13,520 10,046 74.3 % Personnel related expenses, net 3,025 1,884 1,141 60.6 % 7,402 6,408 994 15.5 % Facilities and equipment expenses 860 550 310 56.4 % 2,592 1,718 874 50.9 % Total research and development expenses, net $ 17,699 $ 7,053 $ 10,646 * $ 33,560 $ 21,646 $ 11,914 55.0 % * Greater than 100% Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies performed by contract research organizations, clinical and regulatory consultants, personnel related expenses and laboratory supplies related to conducting research and development activities. Costs to acquire and manufacture pre-launch inventory, mRNA supply for preclinical studies and clinical trials are recognized and included in external pipeline development expenses for the specific program. The IND for our LUNAR-OTC (ARCT-810) program was accepted by the FDA in April 2020. As a result, the costs for this program increased by $2.1 million and $1.2 million for the three and nine months ended September 30, 2020, respectively, as compared to 2019. LUNAR-CF expenses increased by $0.7 million and $1.5 million during the three and nine months ended September 30, 2020, respectively, as compared to 2019. 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 Cystic Fibrosis Foundation (“CFF”). Agreement executed in July 2019, and we expect that our development efforts and associated costs will increase in the near-term as the LUNAR-CF program moves toward expected IND submission expected in 2021. The current year amount was partially offset with funds awarded by the CFF. In March 2020, we signed a contract for approximately $10.1 million (using the exchange rate at the time the grant contract was entered into) with the Singapore Economic Development Board that will fund a portion of the costs incurred in our LUNAR-COV19 program. In October 2020, we entered into an additional grant agreement for approximately $6.7 million (using the exchange rate at the time the grant contract was entered into). We expect that the program costs and pre-launch inventory costs will continue to increase as the clinical trial progresses and we advance program development. The research and development costs were $6.2 million and $8.8 million for the three and nine months ended September 30, 2020, respectively. There were no comparable costs in 2019. 19 Discovery technologies represents our efforts to expand our product pipeline and are expected to continually increase over the near future. H owever, during the three and nine months ended September 30, 2020 as compared to 2019, our discovery technologies costs remained flat and decreased by $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 and nine months ended September 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 nine months ended September 30, 2020 increased by $1.1 million and $1.0 million, respectively, as compared to 2019. This increase was associated with increased headcount necessary to advance our clinical efforts and platform efforts . During the three and nine months ended September 30, 2020, personnel related expenses were offset by $0.3 million and $1.4 million of funds received from CFF, respectively, and $1.0 million and $1.7 million of funds received from the Singapore Economic Development Board, respectively. 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. Additionally, the increase in personnel related expenses associated with an increase in share-based compensation as compared to 2019 as a result of an increase in stock price. Facilities and equipment expenses increased by $0.3 million and $0.9 million during the three and nine months ended September 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. General and Administrative Expenses 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 and nine months ended September 30, 2020 as compared to the three and nine months ended September 30, 2019 increased by $1.7 million and $3.3 million, respectively. This increase resulted primarily from personnel expense due to increased headcount and share-based compensation. Finance expense, net Three Months Ended September 30, 2019 to 2020 Nine Months Ended September 30, (Dollars in thousands) 2020 2019 $ change % change 2020 2019 $ change % change Finance expense, net: Interest income $ 124 $ 85 $ 39 45.9 % $ 301 $ 293 $ 8 2.7 % Interest expense (190 ) (205 ) 15 -7.3 % (640 ) (614 ) (26 ) 4.2 % Total $ (66 ) $ (120 ) $ 54 -45.0 % $ (339 ) $ (321 ) $ (18 ) 5.6 % Interest income, which is generated on cash and cash equivalents, increased for the three and nine months ended September 30, 2020 as compared to 2019. The increase resulted from higher balances of cash and cash equivalents, as a result of our equity offerings in April and July 2020. The increase in interest income was offset by recent significant reductions in interest rates. Interest expense, which is related to our Loan and Security Agreement with Western Alliance Bank , remained relatively flat for the three and nine months ended September 30, 2020 as compared to 2019. Off-balance sheet arrangements Through September 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, Debt ” in our Condensed Consolidated Financial Statements for a summary of changes in the long-term debt position of the Company as of September 30, 2020. As of September 30, 2020, we have non-cancelable contractual obligations totaling approximately $6.4 million. 20 Liquidity and Capital Resources We are a clinical stage bioscience company that is dependent on obtaining external equity and debt financings to fund our operations. We expect to continue to incur losses and utilize significant cash resources until we successfully develop a new successful drug. 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 phases 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, bank debt, option and warrant exercises, and interest income. From inception through September 30, 2020, we raised approximately $480.2 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 September 30, 2020, we had approximately $307.1 million in cash, cash equivalents, and restricted cash. During the third quarter of 2020, the Company raised additional capital of approximately $186.6 million through an underwritten public offering. In addition, the Company has borrowed $15.0 million through its facility with Western Alliance Bank. Overview The following table shows a summary of our cash flows for the nine months ended September 30, 2020 and 2019 (in thousands): Nine Months Ended September 30, (Dollars in thousands) 2020 2019 Cash provided by (used in): Operating activities $ (36,229 ) $ 1,093 Investing activities (1,045 ) (503 ) Financing activities 272,944 36,873 Net increase in cash, cash equivalents and restricted cash $ 235,670 $ 37,463 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, stock option exercises, 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 $36.2 million on a net loss of $41.0 million for the nine months ended September 30, 2020, compared to net cash provided of $1.1 million on a net loss of $15.0 million for the nine months ended September 30, 2019. Adjustments for non-cash charges, including share-based compensation, depreciation and amortization, interest expense and loss from equity-method investment were $5.8 million and $2.4 million for the nine months ended September 30, 2020 and 2019, respectively. Changes in working capital resulted in adjustments to operating net cash outflows of $1.0 million for the nine months ended September 30, 2020, and were driven by increases in accounts receivable and prepaid expenses as well as a decrease in deferred revenue offset by increases in accounts payable and accrued expenses. Changes in working capital resulted in adjustments to operating net cash inflows of $13.7 million for the nine months ended September 30, 2019, and were driven by decreases in accounts receivable as well as decreases in deferred revenue, accrued expenses and accounts payable offset by an increase in prepaid expenses. Investing Activities Net cash used in investing activities of $1.0 million and $0.5 million for the nine months ended September 30, 2020 and 2019, respectively, reflected cash used to purchase property and equipment Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2020 reflected proceeds of $9.6 million from the issuance of common stock to Ultragenyx upon exercise of its option, proceeds from the issuance of common stock of $261.9 million, and proceeds from the exercise of stock options of $1.5 million. Net cash provided by financing activities for the nine months 21 ended September 30, 2019 reflected proceeds of (i) $15.5 million from the is suance of restricted common stock , (ii) $ 2 1 . 3 million from the issuance of common stock, and (iii) $0.1 million from the exercise of stock options . Funding Requirements 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. We intend to seek additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners or through other sources of financing. Should we seek additional financing from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or discontinue the advancement of product candidates, reduce headcount, dispose or out-license programs or technology, or engage in an alternative strategic transaction. Our future funding requirements are difficult to forecast and will depend on many factors, including the following: • the achievement of positive clinical results; • the achievement of milestones under our collaboration agreements; • the terms and timing of any other collaboration, licensing and other arrangements that we may establish; • the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates; • the number and characteristics of product candidates that we pursue; • the outcome, timing and cost of regulatory approvals; • delays that may be caused by changing regulatory requirements; • the cost and timing of hiring new employees to support our continued growth; • the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; • the costs and timing of procuring clinical and commercial supplies of our product candidates; • the costs and timing of establishing sales, marketing and distribution capabilities; • the costs associated with legal proceedings; and • the extent to which we acquire or invest in businesses, products or technologies. 22 Item 3. 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, and foreign currency exchange rate risk relates to grants 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.