Item 2. Management’s Discussion and Analysis
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 six-month periods ended June 30, 2021. Unless otherwise specified herein, references to the “Company,” “Arcturus,” “we,” “our” and “us” mean Arcturus Therapeutics Holdings Inc. 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. 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, 2020 (the “2020 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (the “Commission”) on March 1, 2021. Unless otherwise defined herein, capitalized words and expressions used herein shall have the same meanings ascribed to them in the 2020 Annual Report.
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.
Overview
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 January 2021, we announced completion of the Phase 1 clinical study of our lead 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 January 2021, we commenced a Phase 2 clinical study of ARCT-021 in the United States and Singapore. In March 2021, we completed enrollment of the Phase 2 study, with 579 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 of ARCT-021 support the rationale to initiate a Phase 3 efficacy study. ARCT-021 has been selected by a global entity for inclusion in a multinational Phase 3 vaccine trial against COVID-19. The placebo-controlled study plans to enroll tens of thousands of participants and will evaluate a 5-µg dose of ARCT-021 administered as a single injection regimen. The Phase 3 study, upon commencement, will be sponsored and funded by the entity. However, the entity may determine not to initiate, or to delay or halt, the Phase 3 clinical trial.
In August 2021, our strategic partner, Vinbiocare Biotechnology Joint Stock Company (“Vinbiocare”) received approval for a Clinical Trial Application (CTA) from the Vietnam Ministry of Health to advance ARCT-154, a next generation LUNAR-COV19 vaccine candidate, into a Phase 1/2/3 clinical study. The trial is a randomized, observer-blind, placebo-controlled design and will be funded by Vinbiocare, a subsidiary of Vingroup Joint Stock Company, the largest private industry conglomerate in Vietnam. The study is to assess the safety, immunogenicity and efficacy of the SARS-CoV-2 self-amplifying mRNA vaccine in up to 21,000 adults. Preclinical data demonstrate strong neutralizing immunogenicity in non-human primates to SARS-CoV-2 Alpha, Beta, Gamma, and Delta variants. ARCT-154 elicits 14.4 to 25.9-fold higher neutralizing antibody titers than ARCT-021 in non-human primates, including an observed increase of 17.8-fold higher neutralizing antibody titers against the Delta variant.
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ARCT-154 utilizes an optimized STARR™ mRNA with multiple improvements, including modifications for stability and translation, increased immunogenicity of the spike protein antigen via amino acid substitution, expressing the spike protein in a pre-fusion state, and inactivating the furin cleavage site.
Neutralizing Titers (Geo Mean NT50) Against Variants of Concern in Cynomolgus Macaques
One Month Post Dose 2
STARR™ Vaccine
Ancestral
Alpha
Beta
Gamma
Delta
ARCT-021 (7.5 mcg x 2)
1,438
603
54
50
386
ARCT-154 (7.5 mcg x 2)
20,773
9,080
874
1,297
6,876
Fold Improvement
14.4
15.1
16.2
25.9
17.8
Non-Human Primate (NHP) data collected one month after second dose of 7.5 mcg; analysis of NHP serum was performed using non-replicating vesicular stomatitis virus pseudo-typed with the spike protein of the SARS-CoV-2 variants of concern indicated. Titers were determined by calculating the dilution that resulted in 50% inhibition of cells expressing GFP encoded by the pseudovirus, a surrogate of virus infection. No assurances can be given that non-human primate data will be replicated in human subjects or that ARTC-154 will prove to be effective.
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T cell responses for ARCT-021 and ARCT-154 are robust and similar in non-human primates. Notably, STARR™ mRNA vaccines elicit T cell responses consistent against all variants of concern tested. The robust T cell responses are attributed to the self-amplifying mRNA mechanism of antigen expression.
T cell responses from non-human primates assessed one month after second dose of 7.5 mcg; SARS-CoV-2 spike specific T cell responses were analyzed by ELISpot assay using overlapping 15-mer peptides spanning the entire spike antigen from the ancestral SARS-CoV-2 strains or the Alpha, Beta, and Gamma variants of concern. Spot Forming Units (SFU) were determined after background subtraction of unstimulated controls .
On August 3, 2021, we announced the approval for a Clinical Trial Application (CTA) from the Singapore Health Sciences Authority (HSA) to enable the advancement of two STARR™ mRNA vaccine candidates into the clinic. The Phase 1/2 clinical trial will evaluate the vaccines both as a primary vaccination series and as a booster following initial vaccination with another authorized vaccine. The Phase 1/2 trial costs are funded in part from a previously secured grant from Singapore.
In November 2020, we completed our ARCT-810 Phase 1, dose escalation study in healthy subjects, at doses up to 0.4 mg/kg. On July 28, 2021, the Company announced that it has received approval from the UK Health Research Authority to initiate a Phase 2 clinical study for ARCT-810, a novel mRNA-based therapeutic candidate for Ornithine Transcarbamylase (“OTC”) Deficiency.
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 June 30, 2021, we had an accumulated deficit of $247.4 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, 2020. 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.
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Collaboration Revenue
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 June 30,
2020 to 2021
(Dollars in thousands)
2021
2020
$ change
% change
Collaboration revenue
$
2,001
$
2,322
$
(321
)
-13.8
%
Six Months Ended June 30,
2020 to 2021
(Dollars in thousands)
2021
2020
$ change
% change
Collaboration revenue
$
4,128
$
4,968
$
(840
)
-16.9
%
Collaboration revenue decreased by $0.3 million during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020. The decrease in collaboration revenue primarily relates to a decrease in sublicense revenue as we received approximately $0.3 million in sublicense revenue from SGI in the second quarter of 2020 that did not reoccur in 2021. The decrease was also attributable to a $0.3 million decrease in revenue from material transfer agreements as we have shifted more resources into the COVID-19 vaccine program. The decrease was partially offset by higher research and development expense reimbursements recognized in the second quarter of 2021 primarily related to other collaboration agreements including Janssen.
Collaboration revenue decreased by $0.8 million during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The decrease in collaboration revenue primarily relates to (i) a decrease in sublicense revenue as we received approximately $0.3 million in sublicense revenue from SGI during the first six months of 2020 that did not reoccur in 2021 and (ii) a $0.3 million decrease in revenue from material transfer agreements as we have shifted more resources into the COVID-19 vaccine program.
Our operating expenses consist of research and development and general and administrative expenses.
Three Months Ended June 30,
2020 to 2021
Six Months Ended June 30,
2020 to 2021
(Dollars in thousands)
2021
2020
$ change
% change
2021
2020
$ change
% change
Operating expenses:
Research and development, net
$
45,679
$
7,944
$
37,735
*
$
95,729
$
15,861
$
79,868
*
General and administrative
10,042
4,420
5,622
*
19,785
8,611
11,174
*
Total
$
55,721
$
12,364
$
43,357
*
$
115,514
$
24,472
$
91,042
*
* Greater than 100%
The following table presents our total research and development expenses by category:
Three Months Ended June 30,
2020 to 2021
Six Months Ended June 30,
2020 to 2021
(Dollars in thousands)
2021
2020
$ change
% change
2021
2020
$ change
% change
External pipeline development expenses:
LUNAR-OTC
$
2,067
$
1,182
$
885
74.9
%
$
5,153
$
4,874
$
279
5.7
%
LUNAR-CF, net
834
968
(134
)
-13.8
%
2,238
1,304
934
71.6
%
LUNAR-COVID, net
27,085
2,428
24,657
*
56,397
2,559
53,838
*
Discovery technologies
5,706
(246
)
5,952
*
13,551
235
13,316
*
External platform development expenses:
Partnered discovery technologies
173
410
(237
)
*
636
780
(144
)
*
Total development expenses
$
35,865
$
4,742
$
31,123
*
$
77,975
$
9,752
$
68,223
*
Personnel related expenses
$
8,563
$
2,174
$
6,389
*
$
15,472
$
4,377
$
11,095
*
Facilities and equipment expenses
1,251
1,028
223
21.7
%
2,282
1,732
550
31.8
%
Total research and development
expenses, net
$
45,679
$
7,944
$
37,735
*
$
95,729
$
15,861
$
79,868
*
22
* 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.
LUNAR- OTC expenses increased by $0.9 million and $0.3 million during the three and six months ended June 30, 2021, respectively, as compared to 2020. The increase related to non-recurring expenses for the Phase 1 clinical trial for ARCT-810.
LUNAR-CF expenses were relatively consistent during the three months ended June 30, 2021 when compared to the three months ended June 30, 2020, decreasing by $0.1 million. LUNAR-CF expenses increased by $0.9 million during the six months ended June 30, 2021 when compared to the six months ended June 30, 2020. Expenses incurred were 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 first half of 2022.
LUNAR-COVID expenses increased by $24.7 million and $53.8 million during the three and six months ended June 30, 2021, respectively, as compared to 2020. 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 $10.0 million and $26.3 million of the increase for the three and six months ended June 30, 2021, respectively, with no expense incurred during the 2020 periods. We expect that the program costs and pre-launch inventory costs will continue to increase as clinical trials progress and we advance program development.
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 $6.0 million and $13.3 million during the three and six months ended June 30, 2021, respectively, as compared to 2020 . The increase is primarily due to the addition of several new development programs during 2020. Further, in the first quarter of 2021 we acquired an exclusive license from Alexion Pharmaceuticals to certain intellectual property for approximately $5.0 million of our common stock, which we expensed in 2021.
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, increased by $6.4 million and $11.1 million during the three and six months ended June 30, 2021, respectively, as compared to 2020. T he increases were associated with increased headcount costs necessary to advance our external pipeline, platform and clinical trial efforts as well as increased share-based compensation expense.
Facilities and equipment expenses increased by $0.2 million and $0.6 million during the three and six months ended June 30, 2021, respectively, as compared to 2020 . The increases 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 increased by $5.6 million and $11.2 million during the three and six months ended June 30, 2021, respectively, as compared to 2020. The increases resulted primarily from personnel expense due to increased headcount and increased share-based compensation expense.
Finance (expense) income, net
Three Months Ended June 30,
2020 to 2021
Six Months Ended June 30,
(Dollars in thousands)
2021
2020
$ change
% change
2021
2020
$ change
% change
Interest income
$
190
$
74
$
116
*
$
378
$
176
$
202
*
Interest expense
(710
)
(195
)
(515
)
*
(1,256
)
(449
)
(807
)
*
Total
$
(520
)
$
(121
)
$
(399
)
*
$
(878
)
$
(273
)
$
(605
)
*
23
* Greater than 100%
Interest income is generated on cash and cash equivalents. The increase in interest income for the three and six months ended June 30, 2021 as compared to the prior year period was a result of increased cash and cash equivalents balances. Interest expense was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank and the Singapore Loan. The increase in interest expense for the three and six months ended June 30, 2021 as compared to the prior year period was primarily 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 gains and losses from foreign currency transactions and from equity-method investments. We recorded a gain of $0.4 million for foreign currency transactions under the Singapore Loan during the first six months of 2021. Additionally, during the three months ended June 30, 2021 we recorded a loss of $0.3 million in connection with our equity-method investment in Vallon Pharmaceuticals, Inc., of which we hold approximately 12%. However, during the first six months of 2021 we have recorded a total net gain of $0.9 million related to the Vallon equity-method investment.
Off-balance sheet arrangements
Through June 30, 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
From the Company’s inception through the quarter ended June 30, 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 June 30, 2021, we had $433.6 million in unrestricted cash and cash equivalents.
Loan and Security Agreement
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.
Grants from the Economic Development Board of the Republic of Singapore
On March 4, 2020, we were awarded a grant (“Grant 1”) from the Economic Development Board of the Republic of Singapore (the “EDB”) to support the co-development of a potential COVID-19 vaccine program 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. On June 29, 2021 the EDB agreed to amend Grant 1 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. We are liable for certain expenses during the program and were also subject to certain conditions including the completion of an external audit within 183 days of the conclusion of the claim period on February 20, 2021, or August 22, 2021, and delivery of 10 grams of LUNAR-COV19 vaccine candidate suitable for use in a phase 3 variant trial in two shipments with a partial shipment by June 30, 2022 and a remaining shipment by September 30, 2022. 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 (“Grant 2”) from the EDB to support the further development of a potential COVID-19 vaccine program. On June 29, 2021 the EDB agreed to amend Grant 2 to update certain delivery and milestone timelines. The grant provides for up to S$9.3 million (approximately US$6.7 million) to support the development of the vaccine candidate for
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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 variant trial in two shipments with a partial shipment by June 30, 2022 and a remaining shipment by September 30, 2022 and (iii) creating an entity in Singapore which was completed during the fourth quarter of 2020, and (iv) initiating a clinical trial for a variant COVID-19 vaccine by March 31, 2022. 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.
Manufacturing Support Agreement
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 candidates (the “Singapore Loan”). In June 2021, the EDB agreed to amend the Singapore Loan. The amendment includes certain loan covenants requiring (i) unused funds as of March 31, 2022 to be subsequently returned within thirty days, subject to any further 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 of expenses paid through June 30, 2021 to be completed by September 30, 2021, and a projection of expenditures through March 31, 2022 followed by an audited statement of actual expenditures through March 31, 2022 by June 30, 2022, (iv) us to deliver 10 grams of LUNAR-COV19 vaccine candidate suitable for use in a phase 3 variant trial in two shipments with a partial shipment by June 30, 2022 and a remaining shipment by September 30, 2022, (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, (vi) and the obligation to repay the Singapore Loan will be secured by an interest in the raw materials and manufacturing equipment purchased by us with the funds from the Singapore Loan in form and substance satisfactory to the EDB in its sole discretion. We elected to borrow the full amount available under the Support Agreement of S$62.1 million ($46.6 million) on January 29, 2021.
The Singapore Loan accrues interest at a rate of 4.5% per anum 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 of 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 draw 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 we have 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 (the “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.
Vinbiocare Agreement
On August 2, 2021, we announced an agreement with Vinbiocare Biotechnology Joint Stock Company (“Vinbiocare”), a member of Vingroup Joint Stock Company, regarding a collaboration to establish a manufacturing facility in Vietnam for the manufacture of our investigational COVID-19 vaccine program, for sale and use within Vietnam.
Under the terms of the arrangement, Vinbiocare will build out a manufacturing facility in Vietnam, and we will provide to Vinbiocare access to proprietary technologies and processes for the manufacture of our investigational COVID-19 vaccine program. We will also provide Vinbiocare with an exclusive license to manufacture the vaccines in Vietnam at the facility solely for distribution in Vietnam. The license and technology transfer applies toward drug product manufacturing but not toward mRNA drug substance manufacturing. Vinbiocare will make an upfront payment of $40 million and be responsible for costs associated with the technology transfer. Vinbiocare will also pay for mRNA drug substance supplied by us and royalties on vaccines produced at the manufacturing facility.
General Financial Resources
A significant portion of our current unrestricted cash and cash equivalents balance of $433.6 million is expected to be utilized during fiscal year 2021 to fund (i) the continued Phase 1 trial and anticipated Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (ii) advancing our new LUNAR-FLU program toward submission of an IND, (iii) and other programs and administrative costs.
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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.
Overview
The following table shows a summary of our cash flows for the six months ended June 30, 2021 and 2020 (in thousands):
Six Months Ended June 30,
(Dollars in thousands)
2021
2020
Cash provided by (used in):
Operating activities
$
(75,893
)
$
(20,352
)
Investing activities
(522
)
(611
)
Financing activities
47,094
85,721
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(29,321
)
$
64,758
Operating Activities
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 $75.9 million on a net loss of $110.9 million for the six months ended June 30, 2021, compared to net cash used of $20.4 million on a net loss of $20.0 million for the six months ended June 30, 2020. Adjustments for non-cash charges were $20.4 million and $3.3 million for the six months ended June 30, 2021 and 2020, respectively. Changes in working capital resulted in adjustments to operating net cash inflows of $14.7 million and outflows of $3.6 million for the six months ended June 30, 2021 and 2020, respectively. Changes in working capital for the six months ended June 30, 2021 were primarily driven by increases in deferred revenue, accounts payable and accrued liabilities, partly offset by decreases in prepaid expenses and accounts receivable. Changes in working capital for the six months ended June 30, 2020 were primarily driven by decreases in deferred revenue, accounts payable, prepaid expenses and accounts receivable and was partly offset by an increase to accrued liabilities.
Investing Activities
Net cash used in investing activities of $0.5 million and $0.6 million for the six months ended June 30, 2021 and 2020, respectively, reflects cash used to purchase property and equipment.
Financing Activities
Net cash provided by financing activities of $47.1 million for the six months ended June 30, 2021 consisted of net proceeds from the Singapore Loan of $46.6 million and proceeds from the exercise of stock options of $0.5 million. Net cash provided by financing activities for the six months ended June 30, 2020 reflects proceeds of $9.6 million from the issuance of common stock to Ultragenyx, proceeds from the issuance of common stock of $75.3 million, and proceeds from the exercise of stock options of $0.8 million.
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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. The Company intends to seek additional capital through equity 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, 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 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;
•
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;
•
the extent to which we acquire or invest in businesses, products or technologies; and
•
the identification and consummation of funding arrangements with third parties, including foreign governments and United States government agencies.
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.
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