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Item 2. Management’s Discussion and Analysis

2021-05-10 compared with 2020-11-09 · 134 added, 137 removed, 64 unchanged (81% of the section changed)

1 unchanged sentence

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.

for the three-month period ended March 31, 2021.

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.

and its consolidated subsidiaries.

You should read the following discussion and analysis together with the interim condensed consolidated financial statements and related notes included elsewhere herein.

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Unless otherwise defined herein, capitalized words and expressions used herein shall have the same meanings ascribed to them in the 2020 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;

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

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.

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.

This report includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements.

You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.

You should also review the factors and risks we describe in the reports we will file or submit from time to time with the Commission after the date of this report.

Arcturus is a global clinical-stage messenger RNA medicines company focused on the development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases.

In addition to our mRNA platform, our proprietary lipid nanoparticle delivery system, LUNAR, has the potential to enable multiple nucleic acid medicines, and our proprietary STARR technology has the potential to provide longer-lasting RNA and sustained protein expression.

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.

In August 2020, we announced the dosing of all subjects in the first cohort of the Phase 1 clinical study of our LUNAR-COV19 vaccine candidate (ARCT-021).

The study was conducted with CTI Clinical Trial and Consulting Services, a global CRO, and in collaboration with Duke-NUS Medical School in Singapore.

In December 2020, we announced that we received approval from the Singapore HSA to proceed with a Phase 2 clinical study of ARCT-021.

In January 2021, we announced that we received FDA allowance to proceed with a Phase 2 study of ARCT-021 in the United States.

In March 2021, we completed enrollment of the Phase 2 study, with 580 subjects randomized and dosed.

We have completed two interim analyses of the Phase 2 safety data, which have been reviewed by the Data and Safety Monitoring Board and support continuation of the Phase 2 trial without amendment.

In addition, interim immunogenicity data demonstrate >90% seroconversion for IgG antibodies binding the full-length spike protein following a single 5µg dose.

These favorable safety and single-dose immunogenicity data support the rationale to initiate a Phase 3 efficacy study and we are in discussions with multiple regulatory authorities.

In November 2020, we completed our ARCT-810 Phase 1, dose escalation study in healthy subjects, at doses up to 0.4 mg/kg.

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.

As of September 30, 2020, we had an accumulated deficit of $112.7 million.

As of March 31, 2021, we had an accumulated deficit of $200.2 million.

Results of Operations

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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,

(Dollars in thousands)

Collaboration revenue

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,

We enter into arrangements with pharmaceutical and biotechnology partners and government agencies that may contain upfront payments, license fees for research and development arrangements, research and development funding, milestone payments, option exercise and exclusivity fees and royalties on future sales.

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

Three Months Ended March 31,

(Dollars in thousands)

Collaboration revenue

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

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.

Collaboration revenue decreased by $0.5 million during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The decrease in collaboration revenue primarily relates to decreased revenue from our collaboration with Takeda.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

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* 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,

Nine Months Ended September 30,

Three Months Ended March 31,

(Dollars in thousands)

External pipeline development expenses:

LUNAR-OTC (ARCT-810)

LUNAR-CF, net

LUNAR-COV19, net

LUNAR-COVID, net

Discovery technologies

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Total development expenses

Personnel related expenses, net

Personnel related expenses

Facilities and equipment expenses

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* Greater than 100%

Research and Development Expenses, net

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.

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.

LUNAR- OTC expenses decreased by $0.6 million, from $3.6 million for the three months ended March 31, 2020 to $3.0 million for the three months ended March 31, 2021.

The decrease was due to non-recurring expenses in 2020 in preparation for submitting an IND for LUNAR-OTC.

LUNAR-CF expenses increased by $1.1 million, from $0.3 million for the three months ended March 31, 2020 to $1.4 million for the three months ended March 31, 2021.

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

The increase in LUNAR-CF expenses 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 several years as the LUNAR-CF program moves toward expected CTA submission in the fourth quarter of 2021.

LUNAR-COV19 expenses increased by $29.2 million, from $0.1 million for the three months ended March 31, 2020 to $29.3 million for the three months ended March 31, 2021.

The increase is due to the fact that the LUNAR-COV19 program did not commence until late in the first quarter of 2020 and is now in clinical trials.

Expenses related to pre-launch inventory represent $16.3 million of the increase.

We expect that the program costs and pre-launch inventory costs will continue to increase as clinical trials progress and we advance program development .

Partnered discovery technologies represents our efforts to expand our product pipeline and are expected to continually increase in the near future.

Partnered discovery technologies increased by $7.5 million from $0.4 million for the three months ended March 31, 2021 2020 to $7.9 million for the three months ended March 31, 2021.

The increase is primarily due to (i) the acquisition of an exclusive license from Alexion Pharmaceuticals to certain intellectual property for approximately $5.0 million of Company common stock and (ii) the addition of several new discovery programs during 2020.

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 and was relatively flat year over year.

We expect partnered discovery technologies expenses to fluctuate based on the needs of our collaboration partners.

Personnel related expenses, net of funds received from CFF and the Singapore EDB, for the three months ended March 31, 2021 increased by $4.7 million as compared to the prior period in 2020.

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

The increase in personnel related expenses during the period ended March 31, 2021 as compared to the period ended March 31, 2020 was primarily due to increased share-based compensation expense.

Facilities and equipment expenses increased by $0.4 million during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

The increase resulted primarily from higher rent and related costs associated with an additional 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,

Nine Months Ended September 30,

General and administrative expenses for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 increased by $5.6 million.

The increase resulted primarily from personnel expense due to increased headcount and increased share-based compensation expense.

Finance (expense) income, net

Three Months Ended March 31,

(Dollars in thousands)

Finance expense, net:

Interest income

Interest expense

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.

* Greater than 100%

Interest income is generated on cash and cash equivalents, and increased for the three months ended March 31, 2021 as compared to the prior year period as a result of the increased cash and cash equivalents balance.

Interest expense was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank and the Singapore Loan, and increased for the three months ended March 31, 2021 as compared to the prior year period primarily as a result of additional accrued interest expense related to the Singapore Loan that was funded in January 2021 .

Other income and expense

Other income and expense items relate to gain and loss from foreign currency and equity-method investment.

We recorded a gain of $0.4 million for foreign currency transactions under the Singapore Loan.

Additionally, we recorded a gain of $1.2 million in connection with our equity-method investment in Vallon Pharmaceuticals, Inc., of which we hold approximately 12%.

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.

Through March 31, 2021, 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.

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.

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,

From the Company’s inception through the quarter ended March 31, 2021, the Company has funded its operations principally with the proceeds from the sale of capital stock, long-term debt and revenues earned through collaboration agreements.

At March 31, 2021, we had $466.9 million in unrestricted cash and cash equivalents.

On October 12, 2018, we entered into a Loan and Security Agreement with Western Alliance Bank whereby we received gross proceeds of $10.0 million under a long-term debt agreement (the “Loan”).

On October 30, 2019, we and the Bank entered into a Third Amendment (the “Third Amendment”) to the Loan and Security Agreement dated as of October 12, 2018 (as amended, the “Loan Agreement”).

Pursuant to the Third Amendment, the Bank agreed to make a term loan to us on October 30, 2019, in the amount of $15.0 million (the “Term Loan”).

The resulting net increase in the indebtedness of us was $5.0 million.

The Term Loan bears interest at a floating rate ranging from 1.25% to 2.75% above the prime rate.

The amendment further provides that the Term Loan has a maturity date of October 30, 2023.

We shall make monthly payments of interest only until the interest-only end date of October 1, 2021 and thereafter shall make monthly payments of principal and interest during a 24-month amortization period.

Upon maturity or prepayment, we will be required to pay a 2% fee as a result of the FDA’s approval to proceed with the Company’s LUNAR-OTC (ARCT-810) program based on its IND submission.

On March 4, 2020, we were awarded a grant (the “Grant”) from the Economic Development Board of the Republic of Singapore (the “EDB”) to support the co-development of a potential COVID-19 vaccine with the Duke-NUS Medical School.

The Grant provides for up to S$14.0 million (approximately US$10.0 million using the exchange rate at the time the grant contract was entered into) in grants to support the development of the vaccine.

We entered into an amendment to the Grant on September 24, 2020 to update certain delivery and milestone timelines.

The Grant has been paid in full by the EDB as a result of the achievement of certain milestones related to the progress of the development of the vaccine, as set forth in the award agreement.

The funds received have been recognized as contra research and development expense in proportion to the percentage covered by the EDB of the overall budget.

We are liable for certain expenses during the program and are also subject to certain conditions, including (i) completing an external audit within 183 days of the conclusion of the claim period on February 20, 2021, or August 22, 2021, and (ii) delivering 10 grams of LUNAR-COV19 vaccine candidate suitable for use in a phase 3 trial in two shipments with a partial shipment by June 30, 2021 and a remaining shipment by September 30, 2021 .

Additionally, we are required to pay an agreed upon royalty rate to Duke-NUS on future net sales of the LUNAR-COV19 vaccine candidate in markets or jurisdictions outside of Singapore .

On October 2, 2020, we were awarded another grant from the EDB to support the further development of a potential COVID-19 vaccine.

The grant provides for up to S$9.3 million (approximately US$6.7 million) to support the development of the vaccine candidate for costs incurred in Singapore subject to certain conditions including (i) completing an external audit within 183 days from March 31, 2021, or September 30, 2021, (ii) delivering 10 grams of LUNAR-COV19 vaccine candidate suitable for use in a phase 3 trial in two shipments with a partial shipment by June 30, 2021 and a remaining shipment by September 30, 2021 and (iii) creating an entity in Singapore which was completed during the fourth quarter of 2020.

The grant will be paid in two installments upon the achievement of certain milestones related to the progress of the development of the vaccine candidate.

We received the first installment of $3.6 million in the fourth quarter of 2020.

We are currently in the process of negotiating amendments to the grants with the EDB.

On November 7, 2020, we entered into a Manufacturing Support Agreement (the “Support Agreement”) with the EDB.

Pursuant to the Support Agreement, the EDB agreed to make a term loan of S$62.1 million , subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (the “Singapore Loan”).

The Singapore Loan and the related side letter includes certain loan covenants requiring (i) unused funds as of June 30, 2021 to be subsequently returned within thirty days, subject to the agreed upon extension of the reconciliation date, (ii) us to provide a quarterly reconciliation report within forty-five days of each financial quarter end, (iii) an external audit to be completed by September 26, 2021, (iv) us to deliver 10 grams of the LUNAR-COV19 vaccine candidate suitable for use in a phase 3 trial in two shipments with a partial shipment by June 30, 2021 and a remaining shipment by September 30, 2021, and (v) us to provide EDB with a right of first refusal on GMP manufacturing slots of the LUNAR-COV19 vaccine candidate up to an agreed-upon maximum amount.

We elected to borrow the full amount available under the Support Agreement of S$62.1 million, or $46.6 million, as a result of applicable exchange rates, on January 29, 2021.

The Singapore Loan accrues interest at a rate of 4 .5 % per annum calculated on a daily basis.

Subject to certain exceptions, the Singapore Loan is intended to be a limited recourse loan that will be repaid solely through a royalty payment o f 10% of net sales proceeds of the LUNAR-COV19 vaccine candidate, up to the amount of the outstanding principal and interest under the Singapore Loan.

However, all unpaid principal and interest under the Singapore Loan will be due and payable five years after the borrowing date, if net sales of the LUNAR-COV19 vaccine exceed a certain minimum threshold during this five year period or we obtain clearance to sell the vaccine in specified jurisdictions.

Unpaid principal and interest under the Singapore Loan will also become due and payable upon an event of default under the Support Agreement.

The first vaccine sales, including the amount of net sales, shall be reported to EDB within 10 days of delivery and quarterly reports of aggregate vaccine sales, including net sales proceeds shall be provided within 30 days after quarter end.

The Singapore Loan is forgivable if the Company has not obtained regulatory approval by the final repayment date and net sales of LUNAR-COV19 are less than $100 million.

If any portion of the Singapore Loan is required to be forgiven pursuant to the terms of the Support Agreement, the EDB has the right to take ownership of certain raw materials and equipment that were purchased by us with proceeds of the Singapore Loan (the “Specified Assets”).

We entered into a security agreement (the “Security Agreement”) for the benefit of the EDB to provide that repayment of the Singapore Loan and related obligations are secured by a lien on the Specified Assets.

In connection with the entry into the Support Agreement, we entered into a consent agreement with Western Alliance Bank and an amendment to the Loan and Security Agreement, dated as of October 12, 2018, to exclude the Specified Assets from Western Alliance Bank’s lien on certain assets of Arcturus.

A significant portion of our current cash and cash equivalents balance of $466.9 million is expected to be utilized during fiscal year 2021 to fund (i) the Phase 2 trial and anticipated Phase 3 trial of our LUNAR-COV19 vaccine candidate, (ii) the continued Phase 1 trial and anticipated Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (iii) advancing our new LUNAR-FLU program toward submission of an IND, (iv) and other programs and administrative costs.

The Phase 3 trial of our LUNAR-COV19 vaccine candidate is expected to be funded primarily or exclusively through our cash reserves.

If we achieve emergency use authorization to market our LUNAR-COV19 vaccine candidate, we will need to raise additional funds through equity financing, additional debt or prepayments from potential customers, among other options, to fund commercialization of LUNAR-COV19.

We anticipate that a Phase 3 trial would continue through 2021, and that we would continue to monitor subjects in the Phase 3 trial into 2022 (whether or not we would receive emergency use authorization for ARCT-021 during 2021).

If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected.

There can be no assurance that we will be able to obtain additional needed financing on acceptable terms or at all.

Additionally, equity or debt financings may have a dilutive effect on the holdings of our existing shareholders.

Our future capital requirements are difficult to forecast and will depend on many factors.

We expect to continue to incur additional losses for the foreseeable future, and we will need to raise additional debt or equity financing or enter into additional partnerships to fund development.

The ability of our Company to transition to profitability is dependent on identifying and developing successful mRNA drug candidates.

In the near future, if we are not able to achieve planned milestones, incur costs in excess of our forecasts, or do not meet covenant requirements of our debt, we will need to reduce discretionary spending, discontinue the development of some or all of our products, which will delay part of our development programs, all of which will have a material adverse effect on our ability to achieve our intended business objectives.

The following table shows a summary of our cash flows for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended March 31,

(Dollars in thousands)

3 unchanged sentences

Financing activities

Net increase in cash, cash equivalents and restricted cash

Net increase (decrease) in cash, cash equivalents 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, 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.

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

We have incurred significant expenses which have been partially offset by cash collected through our collaboration agreements.

Cash collections under the collaboration agreements can vary from year to year depending on the terms of

the agreement and work performed.

These changes on 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 $42.9 million on a net loss of $56.3 million for the three months ended March 31, 2021, compared to net cash used of $11.9 million on a net loss of $9.8 million for the three months ended March 31, 2020.

Adjustments for non-cash charges which includes share-based compensation expense and depreciation and amortization were $11.3 million and $1.5 million for the three months ended March 31, 2021 and 2020, respectively.

Changes in working capital resulted in adjustments to operating net cash inflows of $2.1 million and outflows of $3.5 million for the three months ended March 31, 2021 and 2020, respectively.

Changes in working capital for the three months ended March 31, 2021 were primarily driven by an increase in accounts payable and accrued liabilities and a decrease in prepaid expenses, partly offset by a decrease in deferred revenue.

Changes in working capital for the three months ended March 31, 2020 were primarily driven by decreases in deferred revenue as well as accounts payable and accrued liabilities, and increases account receivable and 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

Net cash used in investing activities of $0.2 million and $0.1 million for the three months ended March 31, 2021 and 2020, 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

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 .

Net cash provided by financing activities of $47.0 million for the three months ended March 31, 2021 consisted of net proceeds from debt related to the Singapore Loan of $46.6 million and proceeds from the exercises of stock options of $0.4 million.

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.

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.

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.

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.

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.

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, liquidate our assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.

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 demonstration of safety and efficacy of our product candidates, particularly ARCT-021, in ongoing clinical trials;

the achievement of milestones under our strategic alliance agreements;

the terms and timing of any other strategic alliance, licensing and other arrangements that we may establish;

the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates;

8 unchanged sentences

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

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.

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, 2020.

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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