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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2022

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number: 001-38942

 

ARCTURUS THERAPEUTICS HOLDINGS INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

32-0595345

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

10628 Science Center Drive, Suite 250

San Diego, California

 

92121

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (858) 900-2660

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

ARCT

 

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

As of November 2, 2022, the registrant had 26,492,869 shares of voting common stock outstanding.

 

 

 


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (unaudited)

1

 

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021

2

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021

3

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

Item 4.

Controls and Procedures

26

PART II.

OTHER INFORMATION

27

Item 1.

Legal Proceedings

27

Item 1A.

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

28

Item 3.

Defaults Upon Senior Securities

28

Item 4.

Mine Safety Disclosures

29

Item 5.

Other Information

29

Item 6.

Exhibits

30

Signatures

33

 

 

i


 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or this quarterly report, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the documents incorporated by reference herein may contain express or implied “forward-looking statements” within the meaning of the federal securities laws, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 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 1A, “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. Forward-looking statements in this quarterly report include, but are not limited to, statements about:

 

our compliance, and ability to remain in compliance, with the stringent requirements of our current and potential government contracts, including our arrangements with the Biomedical Advanced Research and Development Authority, a division of the Office of the Assistant Secretary for Preparedness and Response within the U.S. Department of Health and Human Services and the Department of Defense;
the status, success and benefits of our arrangements with private and governmental entities, some of which are subject to termination for convenience by our counterparties;
regulatory filings, submissions and notices related to our commercial arrangements, including those made to the U.S. Federal Trade Commission and Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976;
the potential effects and benefits of our technologies and product candidates on their own and in comparison to technologies, drugs or courses of treatment currently available or that may be developed by competitors;
the likelihood that clinical data will be sufficient for regulatory approval;
the anticipated timing for receipt of data or results of a study or clinical trial, including the anticipated data for our ARCT-810 trial;
the likelihood or timing of any regulatory approval;
the potential administration regimen or dosage, or ability to administer multiple doses of, any of our product candidates;
our plans to research, develop and commercialize our product candidates;
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 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;
the success of competing therapies that are or may become available;
our ability to obtain and maintain intellectual property protection for our product candidates;
interactions with regulatory authorities in the United States and foreign countries;
our ability to attract and retain experienced and seasoned scientific and management professionals to lead the Company;
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;
the anticipated benefits and success of our collaboration agreement with CSL Seqirus related to the licensure of our STARR™ mRNA technology and LUNAR® lipid-mediated delivery, including our timely receipt of upfront and potential royalty and other payments thereunder;
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 develop sales and marketing capabilities, whether alone or with potential future collaborators;
our ability to avoid, settle or be victorious at costly litigation with shareholders, former executives or others, should these situations arise;
our ability to obtain and deploy funding for our operations and to efficiently use our financial and other resources;

ii


 

our ability to continue as a going concern; and
the accuracy of our estimates regarding future expenses, future revenues, capital requirements and need for additional financing.

 

These and other forward-looking 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 in the same manner due to additional research, preclinical and clinical trial results or otherwise. The forward-looking statements contained in this quarterly report are subject to risks and uncertainties, including those discussed in our other filings with the United States Securities and Exchange Commission, or the Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof unless specifically stated otherwise. 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.

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,
2022

 

 

December 31,
2021

 

(in thousands, except par value information)

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

237,676

 

 

$

370,492

 

Accounts receivable

 

 

2,044

 

 

 

3,367

 

Prepaid expenses and other current assets

 

 

6,960

 

 

 

5,102

 

Total current assets

 

 

246,680

 

 

 

378,961

 

Property and equipment, net

 

 

11,347

 

 

 

5,643

 

Operating lease right-of-use asset, net

 

 

33,519

 

 

 

5,618

 

Equity-method investment

 

 

 

 

 

515

 

Non-current restricted cash

 

 

2,081

 

 

 

2,077

 

Total assets

 

$

293,627

 

 

$

392,814

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

17,962

 

 

$

10,058

 

Accrued liabilities

 

 

25,529

 

 

 

23,523

 

Current portion of long-term debt

 

 

27,702

 

 

 

22,474

 

Deferred revenue

 

 

4,656

 

 

 

43,482

 

Total current liabilities

 

 

75,849

 

 

 

99,537

 

Deferred revenue, net of current portion

 

 

5,179

 

 

 

19,931

 

Long-term debt, net of current portion

 

 

32,038

 

 

 

40,633

 

Operating lease liability, net of current portion

 

 

31,218

 

 

 

4,502

 

Other non-current liabilities

 

 

3,676

 

 

 

 

Total liabilities

 

$

147,960

 

 

$

164,603

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.001 par value; 60,000 shares authorized; issued and
outstanding shares were
26,492 at September 30, 2022 and 26,372 at December 31, 2021

 

 

26

 

 

 

26

 

Additional paid-in capital

 

 

601,129

 

 

 

575,675

 

Accumulated deficit

 

 

(455,488

)

 

 

(347,490

)

Total stockholders’ equity

 

 

145,667

 

 

 

228,211

 

Total liabilities and stockholders’ equity

 

$

293,627

 

 

$

392,814

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

September 30,

 

 

(in thousands, except per share data)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Revenue

 

$

13,369

 

 

$

2,437

 

 

$

45,706

 

 

$

6,565

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net

 

 

37,688

 

 

 

45,398

 

 

 

120,770

 

 

 

141,127

 

 

General and administrative

 

 

12,488

 

 

 

10,860

 

 

 

34,211

 

 

 

30,645

 

 

Total operating expenses

 

 

50,176

 

 

 

56,258

 

 

 

154,981

 

 

 

171,772

 

 

Loss from operations

 

 

(36,807

)

 

 

(53,821

)

 

 

(109,275

)

 

 

(165,207

)

 

Gain (loss) from equity-method investment

 

 

 

 

 

(250

)

 

 

(515

)

 

 

670

 

 

Gain from foreign currency

 

 

1,862

 

 

 

506

 

 

 

3,237

 

 

 

923

 

 

Finance expense, net

 

 

(321

)

 

 

(519

)

 

 

(1,445

)

 

 

(1,397

)

 

Net loss

 

$

(35,266

)

 

$

(54,084

)

 

$

(107,998

)

 

$

(165,011

)

 

Net loss per share, basic and diluted

 

$

(1.33

)

 

$

(2.05

)

 

$

(4.09

)

 

$

(6.27

)

 

Weighted-average shares outstanding, basic and diluted

 

 

26,467

 

 

 

26,338

 

 

 

26,423

 

 

 

26,302

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(35,266

)

 

$

(54,084

)

 

$

(107,998

)

 

$

(165,011

)

 

Comprehensive loss

 

$

(35,266

)

 

$

(54,084

)

 

$

(107,998

)

 

$

(165,011

)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

(in thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

BALANCE – December 31, 2021

 

 

26,372

 

 

$

26

 

 

$

575,675

 

 

$

(347,490

)

 

$

228,211

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(51,169

)

 

 

(51,169

)

Share-based compensation expense

 

 

 

 

 

 

 

 

7,371

 

 

 

 

 

 

7,371

 

Issuance of common stock upon exercise of stock options

 

 

35

 

 

 

 

 

 

336

 

 

 

 

 

 

336

 

BALANCE – March 31, 2022

 

 

26,407

 

 

$

26

 

 

$

583,382

 

 

$

(398,659

)

 

$

184,749

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(21,563

)

 

 

(21,563

)

Share-based compensation expense

 

 

 

 

 

 

 

 

7,274

 

 

 

 

 

 

7,274

 

Issuance of common stock upon exercise of stock options

 

 

27

 

 

 

 

 

 

257

 

 

 

 

 

 

257

 

BALANCE – June 30, 2022

 

 

26,434

 

 

$

26

 

 

$

590,913

 

 

$

(420,222

)

 

$

170,717

 

Net loss

 

 

 

 

 

 

 

 

 

 

$

(35,266

)

 

 

(35,266

)

Share-based compensation expense

 

 

 

 

 

 

 

 

9,436

 

 

 

 

 

 

9,436

 

Issuance of common stock upon exercise of stock options

 

 

36

 

 

 

 

 

 

369

 

 

 

 

 

 

369

 

Issuance of common stock under equity plans

 

 

22

 

 

 

 

 

 

411

 

 

 

 

 

 

411

 

BALANCE – September 30, 2022

 

 

26,492

 

 

$

26

 

 

$

601,129

 

 

$

(455,488

)

 

$

145,667

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY – (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

(in thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

BALANCE – December 31, 2020

 

 

26,192

 

 

$

26

 

 

$

540,343

 

 

$

(143,816

)

 

$

396,553

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(56,346

)

 

 

(56,346

)

Issuance of common stock related to acquired in-process research and development

 

 

75

 

 

 

 

 

 

5,000

 

 

 

 

 

 

5,000

 

Share-based compensation expense

 

 

 

 

 

 

 

 

6,987

 

 

 

 

 

 

6,987

 

Issuance of common stock upon exercise of stock options

 

 

52

 

 

 

 

 

 

413

 

 

 

 

 

 

413

 

BALANCE – March 31, 2021

 

 

26,319

 

 

$

26

 

 

$

552,743

 

 

$

(200,162

)

 

$

352,607

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(54,581

)

 

 

(54,581

)

Share-based compensation expense

 

 

 

 

 

 

 

 

7,540

 

 

 

 

 

 

7,540

 

Issuance of common stock upon exercise of stock options

 

 

8

 

 

 

 

 

 

82

 

 

 

 

 

 

82

 

BALANCE – June 30, 2021

 

 

26,327

 

 

$

26

 

 

$

560,365

 

 

$

(254,743

)

 

$

305,648

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(54,084

)

 

 

(54,084

)

Share-based compensation expense

 

 

 

 

 

 

 

 

6,870

 

 

 

 

 

 

6,870

 

Issuance of common stock upon exercise of stock options

 

 

9

 

 

 

 

 

 

177

 

 

 

 

 

 

177

 

Issuance of common stock under equity plans

 

 

13

 

 

 

 

 

 

515

 

 

 

 

 

 

515

 

BALANCE – September 30, 2021

 

 

26,349

 

 

$

26

 

 

$

567,927

 

 

$

(308,827

)

 

$

259,126

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2022

 

 

2021

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$

(107,998

)

 

$

(165,011

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

976

 

 

 

883

 

Share-based compensation expense

 

 

24,081

 

 

 

21,397

 

Acquired in-process research and development expense

 

 

 

 

 

5,000

 

Loss (gain) from equity-method investment

 

 

515

 

 

 

(670

)

Foreign currency transaction gain

 

 

(2,976

)

 

 

(923

)

Other non-cash expenses

 

 

3,899

 

 

 

2,477

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Accounts receivable

 

 

1,323

 

 

 

110

 

Prepaid expense and other assets

 

 

(1,858

)

 

 

(2,302

)

Accounts payable

 

 

5,335

 

 

 

(2,569

)

Accrued liabilities

 

 

2,015

 

 

 

13,569

 

Deferred revenue

 

 

(53,578

)

 

 

35,493

 

Net cash used in operating activities

 

 

(128,266

)

 

 

(92,546

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(3,919

)

 

 

(2,288

)

Net cash used in investing activities

 

 

(3,919

)

 

 

(2,288

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

Proceeds from debt

 

 

 

 

 

46,599

 

Proceeds from exercise of stock options

 

 

962

 

 

 

672

 

Proceeds from the issuance of common stock under equity plans

 

 

411

 

 

 

515

 

Payments on debt obligations

 

 

(2,000

)

 

 

 

Net cash used in (provided by) financing activities

 

 

(627

)

 

 

47,786

 

NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(132,812

)

 

 

(47,048

)

Cash, cash equivalents and restricted cash at beginning of the period

 

 

372,569

 

 

 

463,002

 

Cash, cash equivalents and restricted cash at end of the period

 

$

239,757

 

 

$

415,954

 

 

 

 

Nine Months Ended September 30,

 

 

 

2022

 

 

2021

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

585

 

 

$

514

 

Non-cash investing activities

 

 

 

 

 

 

Right-of-use assets acquired through operating leases

 

$

30,191

 

 

$

1,828

 

Acquisition of in-process research and development through issuance of common stock

 

$

 

 

$

5,000

 

Purchase of property and equipment in accounts payable and accrued expenses

 

$

2,761

 

 

$

60

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Arcturus Therapeutics Holdings Inc. (the “Company” or "Arcturus") is a global late-stage clinical messenger RNA medicines company focused on the development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases. The Company became a clinical stage company during 2020 when it announced that its Investigational New Drug (“IND”) application for ornithine transcarbamylase (“OTC”) deficiency and its Clinical Trial Application (“CTA”) for candidate LUNAR-COV19 were approved by applicable health authorities.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Arcturus and its subsidiaries and are unaudited. All intercompany accounts and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management’s opinion, the accompanying condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the results for the interim periods presented.

Interim financial results are not necessarily indicative of results anticipated for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

These condensed consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions regarding the valuation of debt instruments, the equity-method investment, share-based compensation expense, accruals for liabilities, income taxes, revenue and deferred revenue, leases, and other matters that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Although these estimates are based on management’s knowledge of current events and actions the Company may undertake in the future, actual results may ultimately differ from these estimates and assumptions.

Joint Ventures, Equity Method Investments and Variable Interest Entities

Investments for which the Company exercises significant influence, but does not have control are accounted for under the equity method. Equity method investment activity is related to a 49% joint venture with Axcelead, Inc. (see the following paragraph for further details) and an 7% ownership in Vallon Pharmaceuticals, Inc. (see “Note 10, Related Party Transactions” for further details). The Company’s share of the investees’ results is presented as either income or loss from equity method investees in the accompanying condensed consolidated statements of operations and comprehensive loss.

In April 2021, Arcturus and Axcelead, Inc., a company existing under the laws of Japan (“Axcelead”), formed a joint venture entity, named Arcalis, Inc. (“JV Entity”), which operates as a corporation under the laws of Japan. Axcelead is an integrated drug discovery solutions provider to the pharmaceutical industry in Japan. On July 1, 2017, Axcelead became the successor to a portion of the drug discovery research department of Takeda Pharmaceutical Company Limited. The goal of the JV Entity is to be a contract development and manufacturing organization focused on mRNA manufacturing that would provide manufacturing services to the Company and also to third parties. The joint venture includes a shareholders agreement which sets forth initial funding of the JV Entity and rights of the JV Entity shareholders, including certain approval rights of Arcturus. As part of the joint venture, the Company entered into a License and Technology Transfer Agreement with the JV Entity, pursuant to which Arcturus grants to JV Entity a nonexclusive license to certain intellectual property for use at the JV Entity’s facilities, and obligates Arcturus to conduct certain technology transfer activities.

The Company consolidates variable interest entities (“VIEs”) where it has been determined that the Company is the primary beneficiary of those entities’ operations. Management believes that power is shared between Arcturus and Axcelead, as unrelated parties. The consent of each of the parties is substantive and is required to make the decisions about the JV Entity’s significant activities. Management does not believe that Arcturus has the power to direct the activities of the JV Entity that most significantly impact the JV Entity’s economic performance. Therefore, the Company concluded it is not required to consolidate the JV Entity under the VIE model.

6


 

The equity method of accounting is applicable for the JV Entity as the Company does not own more than 50% of voting power, but has influence over the operation and financial policies of the investee. The Company accounts for its investment in the JV Entity using the equity method of accounting as specified in Accounting Standard Codification (“ASC”) 323, Investments — Equity Method and Joint Ventures. Under ASC 323, equity method investments are recorded initially at cost. The Company’s initial investment in the JV Entity totaled $9.2 million. However, the JV Entity paid back the Company's initial investment of $9.2 million as an upfront fee/consideration for the License and Technology Transfer Agreement. In substance, there was no cash consideration paid by the Company for its 49% equity interest in the JV Entity.

Liquidity

The Company has incurred significant operating losses since its inception. As of September 30, 2022 and December 31, 2021, the Company had an accumulated deficit of $455.5 million and $347.5 million, respectively.

The Company’s activities since inception have consisted principally of research and development activities, general and administrative activities, and raising capital. The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding before the Company achieves sustainable revenues and profit from operations. From the Company’s inception through September 30, 2022, the Company has funded its operations principally with the proceeds from the sale of capital stock, revenues earned through collaboration agreements and proceeds from long-term debt.

At September 30, 2022, the Company’s balance of cash and cash equivalents, including restricted cash, was $239.8 million.

Management believes that it has sufficient working capital on hand to fund operations through at least the next twelve months from the date these condensed consolidated financial statements were available to be issued. There can be no assurance that the Company will be successful in securing additional funding, that the Company’s projections of its future working capital needs will prove accurate, or that any additional funding would be sufficient to continue operations in future years.

Segment Information

In making decisions regarding resource allocation and assessing performance, the chief operating decision-maker identifies operating segments as components of an enterprise for which separate discrete financial information is available for evaluation. The Company and its chief operating decision-maker view the Company’s operations and manage its business in one operating segment, which is the research and development of medical applications for the Company’s nucleic acid-focused technology.

Revenue Recognition

The Company determines revenue recognition for arrangements within the scope of Topic 606 by performing the following five steps: (i) identify the contract; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

The terms of the Company’s revenue agreements include license fees, upfront payments, milestone payments, reimbursement for research and development activities, option exercise fees, transfer of drug substance, consulting and related technology transfer fees and royalties on sales of commercialized products. Arrangements that include upfront payments are recorded as deferred revenue upon receipt or when due and may require deferral of revenue recognition to a future period until the Company performs obligations under these arrangements. The event-based milestone payments represent variable consideration, and the Company uses the most likely amount method to estimate this variable consideration because the Company will either receive the milestone payment or will not, which makes the potential milestone payment a binary event. The most likely amount method requires the Company to determine the likelihood of earning the milestone payment. Given the high degree of uncertainty around achievement of these milestones, the Company determines the milestone amounts to be fully constrained and does not recognize revenue until the uncertainty associated with these payments is resolved. The Company will recognize revenue from sales-based royalty payments when or as the sales occur. The Company will re-evaluate the transaction price in each reporting period as uncertain events are resolved and other changes in circumstances occur.

A performance obligation is a promise in a contract to transfer a distinct good or service to the collaborative partner and is the unit of account in Topic 606. A contract’s transaction price is allocated to each distinct performance obligation based on relative standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied.

Leases

See “Note 9, Commitments and Contingencies” for specific details surrounding the Company’s leases.

7


 

Research and Development, Net

All research and development costs are expensed as incurred. Research and development costs consist primarily of salaries, share-based compensation, employee benefits, costs associated with preclinical studies and clinical trials (including amounts paid to clinical research organizations and other professional services), in process research and development expenses and license agreement expenses, net of any grants, and prelaunch inventory. Payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received.

The Company records accruals for estimated research and development costs, comprising payments for work performed by third party contractors, laboratories, participating clinical trial sites, and others. Some of these contractors bill monthly based on actual services performed, while others bill periodically based upon achieving certain contractual milestones. For the latter, the Company accrues the expenses as goods or services are used or rendered. Clinical trial site costs related to patient enrollment are accrued as patients enter and progress through the trial.

Pre-Launch Inventory

Prior to obtaining initial regulatory approval for an investigational product candidate, the Company expenses costs relating to production of inventory as research and development expense in its condensed consolidated statements of operations and comprehensive loss, in the period incurred. When the Company believes regulatory approval and subsequent commercialization of an investigational product candidate is probable, and the Company also expects future economic benefit from the sales of the investigational product candidate to be realized, it will then capitalize the costs of production as inventory.

Statement of Cash Flows

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheet to the total of the same such amounts shown in the condensed consolidated statement of cash flows:

 

(in thousands)

 

September 30, 2022

 

 

September 30, 2021

 

Cash and cash equivalents

 

$

237,676

 

 

$

413,880

 

Non-current restricted cash

 

 

2,081

 

 

 

2,074

 

Total cash, cash equivalents and restricted
   cash shown in the statement of cash flows

 

$

239,757

 

 

$

415,954

 

 

Net Loss per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by dividing the net loss by the weighted-average number of shares of common stock and dilutive common stock equivalents outstanding for the period determined using the treasury-stock method.

No dividends were declared or paid during the reported periods.


Recently Issued Accounting Standards Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on our condensed consolidated financial statements and disclosures.

Note 2. Revenue

The Company has entered into license agreements and collaborative research and development arrangements with pharmaceutical and biotechnology companies, as well as consulting, related technology transfer, drug substance transfer and product revenue agreements. Under these arrangements, the Company is entitled to receive license fees, consulting fees, product fees, technological transfer fees, upfront payments, milestone payments if and when certain research and development milestones or technology transfer milestones are achieved, royalties on approved product sales and reimbursement for research and development activities. The Company’s costs of performing these services are included within research and development expenses. The Company’s milestone payments are typically defined by achievement of certain preclinical, clinical, and commercial success criteria. Preclinical milestones may include in vivo proof of concept in disease animal models, lead candidate identification, and completion of IND-enabling toxicology studies. Clinical milestones may, for example, include successful enrollment of the first patient in or completion

8


 

of Phase 1, 2 and 3 clinical trials, and commercial milestones are often tiered based on net or aggregate sale amounts. The Company cannot guarantee the achievement of these milestones due to risks associated with preclinical and clinical activities required for development of nucleic acid medicine-based therapeutics and vaccines.

The following table presents changes during the nine months ended September 30, 2022 in the balances of contract assets, including receivables from collaborative partners, consulting and related technology transfer partners, and contract liabilities, including deferred revenue, as compared to what was disclosed in the Company’s Annual Report.

 

(in thousands)

 

Contract Assets

 

BALANCE - December 31, 2021

 

$

3,367

 

Additions for revenue recognized from billings

 

 

1,700

 

Deductions for cash collections

 

 

(3,023

)

BALANCE – September 30, 2022

 

$

2,044

 

 

 

 

 

(in thousands)

 

Contract Liabilities

 

BALANCE - December 31, 2021

 

$

63,413

 

Additions for advanced billings

 

 

1,700

 

Reclassifications to accrued liabilities

 

 

(9,572

)

Deductions for promised services provided in current period

 

 

(45,706

)

BALANCE – September 30, 2022

 

$

9,835

 

 

The following table summarizes the Company’s revenues for the periods indicated (in thousands).

 

 

 

For the Three Months
Ended September 30,

 

 

For the Nine Months
Ended September 30,

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Vinbiocare

 

$

11,237

 

 

$

600

 

 

$

26,815

 

 

$

600

 

Janssen

 

 

934

 

 

 

636

 

 

 

2,593

 

 

 

2,229

 

Ultragenyx

 

 

928

 

 

 

926

 

 

 

2,814

 

 

 

2,776

 

CureVac

 

 

225

 

 

 

241

 

 

 

673

 

 

 

713

 

Israel Ministry of Health

 

 

 

 

 

 

 

 

12,500

 

 

 

 

Other

 

 

45

 

 

 

34

 

 

 

311

 

 

 

247

 

Total revenue

 

$

13,369

 

 

$

2,437

 

 

$

45,706

 

 

$

6,565

 

 

The following paragraphs provide information regarding the nature and purpose of the Company’s most significant collaboration arrangements.

Vinbiocare

During 2021 the Company entered into certain agreements with Vinbiocare, a member of Vingroup Joint Stock Company, whereby the Company would provide technical expertise and support services to Vinbiocare to assist in the build out of a mRNA drug product manufacturing facility in Vietnam. The Company received an upfront payment in aggregate of $40.0 million as part of the Vinbiocare Agreement. In October 2022, the Company and Vinbiocare executed a letter agreement terminating the Technology License and Technical Support Agreement and the Framework Drug Substance Supply Agreement (collectively, the “License & Supply Agreements”). The Company incurred no financial penalties in connection with the termination of the License & Supply Agreements and has no further financial obligations to Vinbiocare under these terminated agreements.

In association with the termination of the License & Supply Agreements, the Company signed in October 2022 the Study Support Agreement with Vinbiocare which provides for Vinbiocare to continue serving as the regulatory and financial sponsor of clinical studies conducted in Vietnam of ARCT-154. To support the continuing activities of these studies, the Study Support Agreement further provides for the Company to conduct certain services and to compensate Vinbiocare to help achieve the objectives of these studies.


 

The Company has determined that the execution of the Study Support Agreement constitutes a type 1 subsequent event and the impact to the transaction price should be recognized as of September 30, 2022, as the contract negotiations began during the third quarter of 2022 and the conditions existed as of September 30, 2022 although not finalized until October 2022. The Company has reserved a portion of the original upfront payment to be paid to Vinbiocare over the future periods pursuant to the Study Support Agreement by reclassifying a portion of the upfront payment received from Vinbiocare pursuant to the License & Supply Agreements,

9


 

from deferred revenue to short-term and long-term liabilities, based on the anticipated timing of the payments to Vinbiocare, and removed that portion of the upfront payment from the transaction price of the modified arrangement. The transaction price was not adjusted for payments that are contingent upon the occurrence of future regulatory or sales related events based on the information currently available to the Company.

The Company has concluded that is has no remaining performance obligations as of September 30, 2022, and therefore has recognized the remaining transaction price of $11.2 million as revenue during the period ended September 30, 2022. As of September 30, 2022, the Company has accrued liabilities related to this arrangement of $5.9 million in current liabilities and $3.7 million in non-current liabilities that will be paid upon the occurrence of specified events through the first quarter of 2025. Vinbiocare is also eligible to receive a single digit percentage of amounts from net sales, if any, of ARCT-154 (or next-generation COVID vaccine) up to a capped amount of low single digit millions. The Company had no remaining deferred revenue as of September 30, 2022. As of December 31, 2021, the deferred revenue balance was $37.2 million.
 

Janssen Pharmaceuticals, Inc., Ultragenyx Pharmaceutical Inc., CureVac AG

For each of Janssen Pharmaceuticals, Inc. (“Janssen”), Ultragenyx Pharmaceutical Inc. (“Ultragenyx”) and CureVac AG (“CureVac”), the Company evaluated the respective agreement in accordance with ASC Topic 606. The Company concluded that the contract counterparty is a customer. The Company identified all promised goods/services within each agreement, and concluded that the promised goods/services are incapable of being distinct and consequently do not have any value on a standalone basis. Accordingly, the promised goods/services within each agreement were determined to represent a single performance obligation. Lastly, the Company concluded that any options to select additional collaboration targets and to license rights to selected targets were not priced at a discount and therefore do not represent performance obligations for which the transaction price would be allocated.

Janssen

In October 2017, the Company entered into a research collaboration and license agreement with Janssen (the “2017 Agreement”) to collaborate on developing candidates for treating HBV with RNA therapeutics. The 2017 Agreement allocated discovery, development, funding obligations, and ownership of related intellectual property among the Company and Janssen.

As of September 30, 2022, the remaining transaction price consisting of upfront consideration received, budgeted reimbursable out-of-pocket costs and a preclinical milestone payment of $1.0 million received in the fourth quarter of 2021, is expected to be recognized using an input method over the remaining research period. None of the remaining development and commercialization milestones were included in the transaction price as they are outside the control of the Company and contingent upon success in future clinical trials and the collaborator’s efforts. Any consideration related to sales-based royalties will be recognized when the related sales occur, provided that the reported sales are reliably measurable, and the Company has no remaining promised goods/services, as such sales were determined to relate predominantly to the license granted to Janssen and therefore have also been excluded from the transaction price.

Total deferred revenue as of September 30, 2022 and December 31, 2021 for Janssen was $6.0 million and $6.3 million, respectively.

On October 31, 2022, Janssen delivered to the Company notice of termination of the 2017 Agreement. The termination is effective 60 days after notice. The Company will not incur any penalties as a result of this termination.

Ultragenyx

In October 2015 the Company entered into a research collaboration and license agreement with Ultragenyx (as amended, the “Ultragenyx Agreement”), whereby Arcturus granted to Ultragenyx a co-exclusive license to certain Arcturus technology, which is in effect only during the reserve target exclusivity term as discussed in the following paragraphs. This collaboration agreement was amended in 2017, 2018 and during the second quarter of 2019. During the initial phase of the collaboration, the Company will design and optimize therapeutics for certain rare disease targets. Ultragenyx has the option under the Ultragenyx Agreement to add additional rare disease targets during the collaborative development period. Additionally, during the collaborative development period, the Company will participate with Ultragenyx in a joint steering committee.

The current potential development, regulatory and commercial milestone payments for the existing development targets as of September 30, 2022 are $138.0 million. Ultragenyx will pay royalties as a single-digit percentage of net sales on a product-by-product and country-by-country basis during the applicable royalty term. As of September 30, 2022, Ultragenyx is working to identify and enroll patients in a Phase 1/2 study.

10


 

As of September 30, 2022, the transaction price included the upfront consideration received, option payments, exclusivity extension payments and additional consideration received pursuant to Amendment 3 of the Ultragenyx Agreement (“Amendment 3”). The Company recognizes the reimbursement of labor and expenses as costs are incurred and none of the development and commercialization milestones were included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that the consideration is outside the control of the Company and contingent upon success in future clinical trials, approval from the FDA and the collaborator’s efforts. Any consideration related to sales-based royalties will be recognized when the related sales occur as they are constrained, provided that the reported sales are reliably measurable and the Company has no remaining promised goods/services, as such sales were determined to relate predominantly to the license granted to Ultragenyx and therefore have also been excluded from the transaction price. During the three months ended September 30, 2022, no adjustments were made to the transaction price.

Amendment 3 was deemed a contract modification and accounted for as part of the original Ultragenyx Agreement. The transaction price is recognized to revenue on a straight-line basis using an input method over the 4-year reserve target exclusivity period. The reserve target exclusivity period represents the timing over which promised goods/services will be provided. Total deferred revenue at September 30, 2022 and December 31, 2021 from Ultragenyx was $2.8 million and $5.5 million, respectively.

CureVac

In January 2018, the Company entered into a Development and Option Agreement (the “Development and Option Agreement”) with CureVac. Under the terms of the Development and Option Agreement, the parties agreed to conduct joint preclinical development programs once CureVac makes a payment to pull down a target on the basis of which CureVac is granted options for taking a license on pre-agreed license terms to develop and commercialize certain products incorporating the Company’s patents and know-how related to LUNAR® delivery technology (the “Arcturus Delivery Technology”), and CureVac patents and know-how related to mRNA technology.

As of September 30, 2022, the transaction price included the upfront consideration received. The Company recognizes the reimbursement of labor and expenses as costs are incurred and none of the development and commercialization milestones were included in the transaction price, as all milestone amounts were fully constrained. As part of its evaluation of the constraint, the Company considered numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and the collaborator’s efforts. Any consideration related to sales-based royalties will be recognized when the related sales occur as they are constrained, provided that the reported sales are reliably measurable and the Company has no remaining promised goods/services, as such sales were determined to relate predominantly to the license granted to CureVac and therefore have also been excluded from the transaction price. As of September 30, 2022, no adjustments were made to the transaction price.
 

The upfront consideration of $5.0 million was recorded as deferred revenue in the Company’s condensed balance sheet upon receipt and is currently being recognized as revenue on a straight-line basis using an input method over the remaining 10 month contractual term as of September 30, 2022. Total deferred revenue as of September 30, 2022 and December 31, 2021 for CureVac was $0.7 million and $1.4 million, respectively.

Other Agreements

In January 2022, the Company entered into an agreement with a pharmaceutical company, whereby the pharmaceutical company agreed to fund up to $25 million for a clinical trial for a LUNAR-COV19 vaccine candidate as a booster. The Company submitted billings from a third party of $4.9 million related to the clinical trial which falls under the expected funding of $25 million of the booster program. The Company received the $4.9 million reimbursement for the billings subsequent to September 30, 2022. The Company has not recognized any revenue associated with this agreement as of September 30, 2022.

Israeli Ministry of Health

On August 17, 2020, the Company entered into an agreement with the Israeli Ministry of Health (the “MOH”) to supply the Company’s COVID-19 vaccine candidate to Israel (the “Israel Supply Agreement”) subject to certain conditions, including applicable regulatory approvals. In October 2020, and in association with the Israel Supply Agreement, the Company received a non-refundable payment of $12.5 million from the MOH. This payment of $12.5 million is associated with a specified clinical trial milestone and serves as an initial reserve payment for a specified number of doses of the LUNAR-COV19 vaccine candidate pursuant to the Israel Supply Agreement. As a result of the making of this payment, the MOH became bound to purchase an initial quantity of 500,000 reserved vaccine doses, as set forth in and subject to the terms and conditions of the Israel Supply Agreement. Furthermore, the Israel Supply Agreement permitted termination by the MOH immediately upon written notice to Arcturus if the Company did not obtain certain regulatory approvals by December 31, 2021. On April 14, 2022, Arcturus received notice from the MOH to terminate the Israel Supply Agreement. Therefore, the Company recognized the payment as revenue during the second quarter of 2022 as there were no

11


 

remaining performance obligations under the agreement. No termination penalties were incurred by the Company connection therewith.

Note 3. Grant Revenue

BARDA Grant

In August 2022, the Company entered into a cost reimbursement contract with the Biomedical Advanced Research and Development Authority ("BARDA"), a division of the Office of the Assistant Secretary for Preparedness and Response (ASPR) within the U.S. Department of Health and Human Services (HHS) for an award of up to $63.2 million for the development of a pandemic influenza vaccine using the Company's STARR™ self-amplifying mRNA vaccine platform technology. The Company earns grant revenue for performing tasks under the agreement.

The Company determined that the agreement with BARDA is not in the scope of ASC 808 or ASC 606. Applying International Accounting Standards No. 20 ("IAS 20"), Accounting for Government Grants and Disclosure of Government Assistance, by analogy, the Company recognizes grant revenue from the reimbursement of direct out-of-pocket expenses, overhead allocations and fringe benefits for research costs associated with the grant. The costs associated with these reimbursements are reflected as a component of research and development expense in the Company’s condensed consolidated statements of operations.

We recognized an immaterial amount of revenue during the three months ended September 30, 2022, which is included in revenue on the Company's condensed consolidated statements of operations. As of September 30, 2022, the remaining available funding net of revenue earned was $63.2 million.

Note 4. Fair Value Measurements

The Company establishes the fair value of its assets and liabilities using the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company established a fair value hierarchy based on the inputs used to measure fair value.

The three levels of the fair value hierarchy are as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3: Unobservable inputs in which little or no market data exists and are therefore determined using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

The carrying value of cash, restricted cash, accounts receivable, accounts payable, accrued liabilities and the Singapore loan approximate their respective fair values due to their relative short maturities. The carrying amounts of long-term debt for the amount drawn on the Company’s debt facility approximates fair value as the interest rate is variable and reflects current market rates.

As of September 30, 2022 and December 31, 2021, all assets measured at fair value on a recurring basis consisted of cash equivalents and money market funds, which were classified within Level 1 of the fair value hierarchy. The fair value of these financial instruments was measured based on quoted prices.

Note 5. Balance Sheet Details

Property and equipment, net balances consisted of the following:

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Research equipment

 

$

8,584

 

 

$

6,735

 

Computers and software

 

 

1,038

 

 

 

488

 

Office equipment and furniture

 

 

958

 

 

 

574

 

Leasehold improvements

 

 

2,486

 

 

 

44

 

Construction in progress

 

 

3,513

 

 

 

2,058

 

Total

 

 

16,579

 

 

 

9,899

 

Less accumulated depreciation and amortization

 

 

(5,232

)

 

 

(4,256

)

Property and equipment, net

 

$

11,347

 

 

$

5,643

 

 

12


 

 

Depreciation and amortization expense was $0.4 million and $0.3 million for the three months ended September 30, 2022 and 2021, and $1.0 million and $0.9 million for the nine months ended September 30, 2022 and 2021, respectively. Construction in progress primarily includes research equipment that is expected to be placed into service during 2022.

Accrued liabilities consisted of the following:

 

(in thousands)

 

September 30, 2022

 

 

December 31, 2021

 

Accrued compensation

 

$

7,802

 

 

$

3,578

 

Cystic Fibrosis Foundation liability (Note 9)

 

 

 

 

 

2,777

 

Current portion of operating lease liability

 

 

3,783

 

 

 

1,537

 

Clinical accruals

 

 

2,026

 

 

 

8,675

 

Vinbiocare contractual liabilities

 

 

5,896

 

 

 

 

Other accrued research and development expenses

 

 

6,022

 

 

 

6,956

 

Total

 

$

25,529

 

 

$

23,523

 

 

Note 6. Debt

Manufacturing Supply Agreement

On November 7, 2020, the Company’s wholly-owned subsidiary, Arcturus Therapeutics, Inc., entered into a Manufacturing Support Agreement (the “Support Agreement”) with the Economic Development Board of the Republic of Singapore (the “EDB”). Pursuant to the Support Agreement, the EDB agreed to make a term loan (the “Singapore Loan”) of S$62.1 million to the Company, subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (ARCT-021). The Singapore Loan accrues interest at a rate of 4.5% per annum calculated on a daily basis. The Company elected to borrow the full amount available under the Support Agreement of S$62.1 million ($46.6 million) on January 29, 2021. The EDB agreed to an extension of the reconciliation period to March 31, 2022, with unused funds as of such date returned to the EDB within 30 days following the completion of the customary audit and signed amendment of the Singapore Loan. This audit is scheduled to be completed during the fourth quarter of 2022. During the third quarter of 2022, the Company reported a portion of the Singapore Loan as current to reflect a potential principal repayment that is pending audit completion of approximately S$20.9 million ($15.7 million) in fiscal year 2022 based on amounts not used towards the manufacture of ARCT-021, and expects to refund this portion in the first quarter of fiscal year 2023.

The Singapore Loan was initially recorded as long-term debt at $46.6 million, the amount of cash proceeds at the time the Company received the funding. During the first quarter of 2022, accrued interest of $1.9 million related to 2021 was added to the principal debt balance in accordance with the terms of the Support Agreement and the balance was adjusted to reflect the current exchange rate resulting in an increase in the debt balance to $47.8 million. The Company recorded a net foreign currency transaction gain of $3.0 million for the nine months ended September 30, 2022 compared to a net foreign currency transaction gain of $0.9 million for the nine months ended September 30, 2021. For the three and nine months ended September 30, 2022, the Company recorded interest expense and a corresponding liability of $0.5 million and $1.6 million, respectively, compared to interest expense and a corresponding liability of $0.5 million and $1.4 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, the Company was in compliance with all covenants under the Singapore Loan and related commitments.

Long-term debt with Western Alliance Bank

On October 12, 2018, Arcturus Therapeutics, Inc. entered into the loan with Western Alliance Bank (the "Bank"), whereby it received $10.0 million (the "Loan").

The Loan is collateralized by all of the assets of Arcturus Therapeutics, Inc., excluding intellectual property, which is subject to a negative pledge. The Loan contains customary conditions of borrowing, events of default and covenants, including covenants that restrict Arcturus Therapeutics, Inc.’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of its capital stock. In addition, Arcturus Therapeutics, Inc. is required to maintain at least 100% of its consolidated, unrestricted cash, or $15.0 million, whichever is lower, with the Bank.

On October 30, 2019, Arcturus Therapeutics, Inc. and the Bank entered into a Third Amendment (the “Third Amendment”) to the Loan (as amended, the “Loan Agreement”).

Pursuant to the amendment, the Bank agreed to make a term loan to Arcturus Therapeutics, Inc. on October 30, 2019, in the amount of $15.0 million (the “Term Loan”). The resulting net increase in the indebtedness of Arcturus Therapeutics, Inc. 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. Arcturus Therapeutics, Inc. will make monthly payments of interest only until October 1, 2021. The Fourth Amendment was executed in connection with the Singapore Loan. In October of 2021, the Company and the Bank entered into a Fifth Amendment to Loan Agreement that provided for a six month extension to the interest only period which moved the first principal payment to May 1, 2022. In April of 2022, the Company and the Bank entered into a Sixth Amendment to Loan Agreement that provided for a three month extension to the interest only period which moved the first principal payment to August 1, 2022.

13


 

Arcturus Therapeutics, Inc. paid a loan origination fee of $54,000 which was recorded as a debt discount along with the remaining loan origination fee from the Loan and is being accreted over the term of the Term Loan. In addition, Arcturus Therapeutics, Inc. is required to pay a fee of $525,000 upon certain change of control events.

The Term Loan may be prepaid in full at any time, subject to a prepayment fee ranging from 0.50% to 2.00% of the prepaid principal amount depending upon the date of the prepayment.

Upon maturity or prepayment (as previously discussed), Arcturus Therapeutics, Inc. will be required to pay a 2% fee as a result of the FDA’s approval to proceed with the Company’s LUNAR-OTC program based on its IND submission. Such fee is accreted to the long-term debt balance using the effective interest method over the term of the Loan Agreement.
 

Should an event of default occur, including the occurrence of a material adverse effect, the Company could be liable for immediate repayment of all obligations under the Loan Agreement. As of September 30, 2022, the Company was in compliance with all covenants under the Loan Agreement.

Principal payments, including the final payment due at repayment, on the long-term debt are as follows as of September 30, 2022:

(in thousands)

 

 

 

2022

 

$

3,000

 

2023

 

 

10,300

 

Total

 

$

13,300

 

The Company recognized interest expense related to its long-term debt of $0.7 million during each of the three months ended September 30, 2022 and 2021, and $2.1 million and $2.0 million during the nine months ended September 30, 2022 and 2021, respectively.

 

Note 7. Stockholders’ Equity

Alexion Pharmaceuticals License Agreement

On February 17, 2021, the Company entered into an exclusive license agreement with Alexion Pharmaceuticals, Inc. (“Alexion”) pursuant to which Alexion granted to the Company an exclusive, worldwide license to exploit certain specified Alexion patent applications. In accordance with the terms of the license agreement, and in exchange for the license, the Company issued 74,713 shares of its common stock to Alexion on February 19, 2021 valued at approximately $5.0 million. The number of shares issued under the agreement was calculated by dividing (i) five million dollars ($5.0 million) by (ii) the volume-weighted average price per share of the Company’s common stock on the Nasdaq Global Market for the thirty (30) trading days immediately preceding the effective date of the license agreement (rounded to the nearest whole share). The Company recorded the transaction as an asset purchase as management concluded that all of the value received was related to a single identifiable asset. Further, the Company concluded that there was no alternative future use for the asset and recorded a charge at the closing of the transaction for the full $5.0 million value assigned to the shares issued in connection with the license agreement. This non-cash charge was recorded as acquired in-process research and development expense in the statements of operations and comprehensive loss.

14


 

Net Loss per Share

Dilutive securities that were not included in the calculation of diluted net loss per share for the three and nine months ended September 30, 2022 as they were anti-dilutive totaled 507,021 and 650,144, respectively, and 1,457,223 and 1,514,023 for the three and nine months ended September 30, 2021.

Note 8. Share-Based Compensation Expense

In June 2022 at the Company’s 2022 Annual Meeting of Stockholders (the "2022 Annual Meeting"), the stockholders of the Company approved an amendment to the Company’s 2019 Omnibus Equity Incentive Plan (as amended, the “2019 Plan”) which, among other things, increases the aggregate number of shares authorized for use in making awards to eligible persons under the 2019 Plan by 3,750,000 shares, for a total of up to 8,750,000 shares available for issuance. On June 30, 2022, the Company filed a Form S-8 with the Commission to register the issuance of up to 3,750,000 additional shares following the 2022 Annual Meeting. As of September 30, 2022, a total of 3,490,857 shares remain available for future issuance under the 2019 Plan, subject to the terms of the 2019 Plan.

In October 2021, the Company adopted the 2021 Inducement Equity Incentive Plan which covers the award of up to 1,000,000 shares of common stock (the “2021 Plan”) effective as of October 15, 2021. Approval of the Company’s stockholders will not be required as a condition to the effectiveness of the 2021 Plan for so long as the plan is in compliance with applicable Nasdaq inducement plan rules. On October 20, 2021, the Company filed a Form S-8 with the Commission to register the issuance of up to 1,000,000 shares underlying awards under the 2021 Plan. In April 2022, the compensation committee of the Company’s board of directors approved a proposal to reduce the total number of shares available for future issuance under the 2021 Plan to 130,000. As of September 30, 2022, a total of 70,400 shares remain available for future issuance under the 2021 Plan, subject to the terms of the 2021 Plan.

Stock Options

Share-based compensation expense included in the Company’s condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2022 and 2021 was as follows:

 

 

 

For the Three Months
Ended September 30,

 

 

 

For the Nine Months
Ended September 30,

 

(in thousands)

 

2022

 

 

 

2021

 

 

 

2022

 

 

 

2021

 

Research and development

 

$

3,996

 

 

 

$

3,304

 

 

 

$

10,811

 

 

 

$

10,132

 

General and administrative

 

 

5,440

 

 

 

 

3,566

 

 

 

 

13,270

 

 

 

 

11,265

 

Total

 

$

9,436

 

 

 

$

6,870

 

 

 

$

24,081

 

 

 

$

21,397

 

 

Note 9. Income Taxes

The Company is subject to taxation in the United States and various states. The Company computes its quarterly income tax provision by using a forecasted annual effective tax rate and adjusts for any discrete items arising during the quarter. The primary difference between the effective tax rate and the federal statutory tax rate relates to the valuation allowances on the Company’s net operating losses.

For the three and nine months ended September 30, 2022 and 2021, the Company recorded no income tax expense. No tax benefit was provided for losses incurred in United States because those losses are offset by a full valuation allowance.

Note 10. Commitments and Contingencies

COVID-19 Vaccine Development

On March 4, 2020, the Company was awarded a grant (“Grant 1”) from the Singapore 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. 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. The parties are in continued negotiations with respect to amendments of Grant 1. Currently, the Company is liable for certain expenses during the program and is also subject to certain conditions including the requirement to pay an agreed upon royalty rate to Duke-NUS on future net sales of the LUNAR-COV19 ARCT-021 vaccine candidate developed with Duke-NUS in markets or jurisdictions outside of Singapore. The Company did not recognize any contra expense related to Grant 1 for the three months ended September 30, 2022 or 2021. The Company did not recognize any contra expense for the nine months ended September

15


 

30, 2022, but recognized $1.3 million of contra expense for the nine months ended September 30, 2021 related to Grant 1. As of September 30, 2022 and December 31, 2021, no amount remained in accrued expenses.

On October 2, 2020, the Company was awarded another grant (“Grant 2”) from the Singapore EDB to support the clinical development of a potential COVID-19 vaccine (ARCT-021). The grant provides for up to S$9.3 million (approximately US$6.7 million) to support the clinical development of the vaccine candidate for costs incurred in Singapore subject to certain conditions. The grant is paid in two installments upon the achievement of certain milestones related to the progress of the development of the vaccine candidate. The Company received the first installment of $3.6 million in the fourth quarter of 2020. The funds received are recognized as contra research and development expense as costs are incurred. During 2021, the Company recognized the remaining amount of the first installment as contra research and development expense for Grant 2. During the first quarter of 2022, the Company and EDB concluded negotiations on this Contract, and thereby reduced the overall amount received by the Company under the Grant to the first installment of $3.6 million. The EDB agreed to an extension of the reconciliation period to March 31, 2022, with unused funds as of such date returned to the EDB within 30 days following the completion of the customary audit and signed amendment of the Singapore Loan. The audit and amendment is expected to be completed during the fourth quarter of 2022.

Cystic Fibrosis Foundation Agreement

On August 1, 2019, the Company amended its Development Program Letter Agreement, dated May 16, 2017 and as amended July 13, 2018, with the Cystic Fibrosis Foundation (“CFF”). Pursuant to the amendment, (i) CFF increased the amount it will award to advance LUNAR-CF to $15.0 million from approximately $3.2 million, (ii) the Company will provide $5.0 million in matching funds for remaining budgeted costs, (iii) the related disbursement schedule from CFF to Arcturus will be modified such that (a) $4.0 million will be disbursed upon execution of the CFF Amendment, (b) $2.0 million will be disbursed within 30 days of the first day of each of January, April, July and October 2020 upon Arcturus invoicing CFF to meet project goals, and (c) the last payment of $3.0 million less the prior award previously paid out, equaling approximately $2.3 million, will be disbursed upon Arcturus Sub invoicing CFF to meet good manufacturing practices and opening an Investigational New Drug (“IND”) application. The funds received from CFF are recognized as contra research and development expense in proportion to the percentage covered by CFF of the overall budget. For the three months ended September 30, 2022 and 2021, the Company recognized contra expense of $0.5 million and $1.6 million, respectively, and for the nine months ended September 30, 2022 and 2021, the Company recognized contra expense of $2.7 million and $3.1 million, respectively. As of September 30, 2022 and December 31, 2021, $0.0 million and $2.8 million, respectively, remained in accrued liabilities.

Leases

In October 2017, the Company entered into a non-cancellable operating lease agreement for office space adjacent to its previously occupied headquarters. The commencement of the lease began in March 2018 and the lease extends for approximately 84 months from the commencement date with a remaining lease term through March 2025. Monthly rental payments are due under the lease and there are escalating rent payments during the term of the lease. The Company is also responsible for its proportional share of operating expenses of the building and common areas. In conjunction with the new lease, the Company received free rent for four months and received a tenant improvement allowance of $74,000. The lease may be extended for one five-year period at the then current market rate with annual escalations; however, the Company deemed the extension option not reasonably certain to be exercised and therefore excluded the option from the lease terms. The Company entered into an irrevocable standby letter of credit with the landlord for a security deposit of $96,000 upon executing the lease which is included (along with additional funds required to secure the letter of credit) in the balance of non-current restricted cash.

In February 2020, the Company entered into a second non-cancellable operating lease agreement for office space near its current headquarters. The lease extended for 13 months from the commencement date and included a right to extend the lease for one twelve-month period. In February 2021, the Company opted to extend the lease through March 2025 to coincide with the lease term of the Company’s headquarters.

In February 2021, the Company entered into a third non-cancellable operating lease agreement for office space near its current headquarters. The lease extends for 12 months from the commencement date with monthly base rent of approximately $11,000. During the third quarter of 2021, the Company opted to extend the lease for an additional 12 months.

In September 2021, the Company entered into a fourth non-cancellable lease agreement for office, research and development, engineering and laboratory space near its current headquarters. The initial term of the lease will extend ten years and eight months from the date of possession, and the Company will have the right to extend the term of the lease for an additional five-year period. When the lease term was determined for our operating lease right-of-use assets and lease liabilities, the extension option for the lease was not included. The lease has a monthly base rent ranging from $268,000 to $360,000 which escalates over the lease term. The Company received a free rent period of four months and also pays for various operating costs, including utilities and real property taxes. The Company entered into an irrevocable standby letter of credit with the landlord for a security deposit of $2.0 million upon

16


 

executing the lease which is included (along with additional funds required to secure the letter of credit) in the balance of non-current restricted cash. The lease term commenced during the second quarter of 2022.

Operating lease right-of-use asset and liability on the condensed consolidated balance sheets represent the present value of remaining lease payments over the remaining lease terms. The Company does not allocate lease payments to non-lease components; therefore, payments for common-area-maintenance and administrative services are not included in the operating lease right-of-use asset and liability. The Company uses its incremental borrowing rate to calculate the present value of the lease payments, as the implicit rate in the lease is not readily determinable.

As of September 30, 2022, the remaining payments of the operating lease liability were as follows:

 

(in thousands)

 

Remaining Lease Payments

 

2022

 

$

1,338

 

2023

 

 

5,482

 

2024

 

 

5,646

 

2025

 

 

4,019

 

2026

 

 

3,603

 

Thereafter

 

 

23,282

 

Total remaining lease payments

 

 

43,370

 

Less: imputed interest

 

 

(8,369

)

Total operating lease liabilities

 

$

35,001

 

Weighted-average remaining lease term

 

9.0 years

 

Weighted-average discount rate

 

 

5.0

%

 

Operating lease costs consist of the fixed lease payments included in operating lease liability and are recorded on a straight-line basis over the lease terms. Operating lease costs were $1.4 million and $0.5 million for the three months ended September 30, 2022 and 2021, respectively, and $3.3 million and $1.4 million for the nine months ended September 30, 2022 and 2021, respectively.

Note 11. Related Party Transactions

Equity-Method Investment

In June 2018, the Company completed the sale of its intangible asset related to the ADAIR technology. Pursuant to the asset purchase agreement for ADAIR, the Company received a 30% ownership interest in the common stock of Vallon Pharmaceuticals, Inc. (“Vallon”) in consideration for the sale of the ADAIR technology. The Company has no requirement to invest further in Vallon. Vallon completed an initial public offering and began trading on The Nasdaq Stock Market under the ticker “VLON” in February 2021. Additionally, Vallon executed the sale of 3,700,000 shares of common stock through a private placement in May 2022 as well as an exercise of warrants for 2,220,000 shares of common stock in August 2022. As a result, Arcturus owns 843,750 shares of Vallon, or approximately 7%. Based on the Company’s ownership and the Vallon board of directors seat held by an executive of Arcturus, the Company has the ability to exercise significant influence over the operating and financial policies of Vallon; therefore, the Company accounts for this investment as an equity-method investment. The Company accounts for its share of the earnings or losses of the investee with a reporting lag of three months, as the financial statements of the investee are not completed on a basis that is sufficient for the Company to apply the equity method on a current basis. The warrant exercise was at a share price of $0.94, greater than the initial investment which resulted in the Company recording a gain in its equity-method investment. Using a three month lag, the gain has been fully offset by losses incurred by Vallon through June 30, 2022.

See “Note 1, Joint Ventures, Equity Method Investments and Variable Interest Entities” for specific details surrounding the Company’s agreement with Axcelead to form the joint venture entity, Arcalis, Inc.

 

 

Note 12. Subsequent Events

CSL Seqirus

On November 1, 2022, the Company entered into a collaboration and license agreement (the "Collaboration Agreement”) with Seqirus, Inc., a part of CSL Limited (“CSL Seqirus”), one of the world’s leading influenza vaccine providers, for the research, development, manufacture and global commercialization of self-amplifying mRNA vaccines.

CSL Seqirus will receive exclusive global access to Arcturus’ technology for vaccines against SARS-CoV-2 (COVID-19), influenza and three other globally prevalent respiratory infectious diseases. Specifically, the Collaboration Agreement grants CSL Seqirus a license to Arcturus’ STARRTM mRNA technology and LUNAR® lipid-mediated delivery, as well as mRNA drug substance and drug product manufacturing expertise. CSL Seqirus would also receive global non-exclusive access to Arcturus’

17


 

intellectual property rights in the field of pandemic preparedness (i.e., pathogens identified as priority diseases by the World Health Organization), with the right to convert to an exclusive license.
 

Arcturus will receive an upfront payment of $200 million. Arcturus will be eligible to potentially receive development milestones totaling more than $1.3 billion if all products are registered in the licensed fields. Arcturus will also be entitled to potentially receive up to $3 billion in commercial milestones based on “net sales” of vaccines in the various fields. In addition, Arcturus is entitled to receive a 40% share of net profits from COVID-19 vaccine sales and up to low double digit royalties of annual net sales for vaccines against influenza and the other three specified infectious disease pathogens, as well as royalties on revenues from vaccines that may be developed for pandemic preparedness. Entitlement to all such payments is subject to the strict conditions, requirements, royalties reduction provisions and other limitations set forth in the Collaboration Agreement.
 

The Collaboration Agreement sets forth how the Company and CSL Seqirus shall collaborate to research and develop vaccine candidates. In the COVID-19 field, the Company will lead activities for certain regulatory filings for ARCT-154 in the US and Europe and for research and development activities of a next-generation COVID vaccine candidate. CSL Seqirus will lead and be responsible for all other research and development in COVID-19, influenza and the other fields. Arcturus will provide to CSL Seqirus a credit over five years to offset expenses of research and development activities (but not against milestone payments) on non-COVID-19 programs that Arcturus conducts at the request of CSL Seqirus. CSL Seqirus will have the sole right to commercialize any products that may be developed.

The Collaboration Agreement will not become effective until expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. Either party may terminate the agreement on a field-by-field basis for material breach by the other party, following notice and opportunity to cure. CSL Seqirus may also terminate the Collaboration Agreement in its entirety or on a field-by-field basis for any reason or no reason whatsoever, but may not exercise this termination “for convenience” of the entire agreement or with respect to the influenza field prior to the first commercial sale of a “vaccine product” in the US, Japan, Australia or specified European countries. The Collaboration Agreement may also be terminated by CSL Seqirus for safety reasons, clinical data nonviability, commercial nonviability and other specified reasons.

The Collaboration Agreement allows the Company to fulfill its obligations under its award from the Biomedical Advanced Research and Development Authority (BARDA) relating to rapid pandemic influenza response and announced by the Company in August 2022.

Janssen

On October 31, 2022, Arcturus received notice of termination from Janssen Pharmaceuticals, Inc. of the Research Collaboration and License Agreement, by and between Arcturus Therapeutics, Inc. and Janssen Pharmaceuticals, Inc., dated October 18, 2017 (the “Janssen Agreement”). The Janssen Agreement provided for the parties to collaborate on developing nucleic acid-based therapeutic candidates for the treatment of Hepatitis B. The Janssen Agreement was terminated in its entirety by Janssen for convenience. Arcturus will not incur any penalties as a result of this termination. The termination is effective 60 days after notice.



 


 


 

18


 

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 period ended September 30, 2022. 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, 2021 (the “2021 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (the “Commission”) on March 1, 2022. Unless otherwise defined herein, capitalized words and expressions used herein shall have the same meanings ascribed to them in the 2021 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 late-stage clinical 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 messenger RNA (“mRNA”) platform, our proprietary lipid nanoparticle delivery system, LUNAR®, has the potential to enable multiple nucleic acid medicines, and our proprietary self-amplifying mRNA technology (Self-Transcribing and Replicating RNA or STARR™) technology has the potential to provide longer-lasting RNA and sustained protein expression at lower dose levels.

We are leveraging our proprietary platform relating to LUNAR® and our nucleic acid technologies to develop and advance a pipeline of mRNA-based vaccines and therapeutics for the prevention of infectious diseases and treatment of rare genetic disorders with significant unmet medical needs. We continue to expand this platform with innovative delivery solutions that allow us to expand our discovery efforts. Our proprietary LUNAR® technology is intended to address major hurdles in RNA drug development, such as the effective and safe delivery of RNA therapeutics to disease-relevant target tissues and for RNA vaccines the mitigation of challenges associated with cold chain storage and distribution via lyophilization. We believe the versatility of our platform to target multiple tissues, its compatibility with various nucleic acid therapeutics, and our expertise in developing scalable manufacturing processes will allow us to deliver on the next generation of nucleic acid medicines.

 

The following chart represents our current pipeline of Partnered mRNA Therapeutics and Vaccines:

 

img265319727_0.jpg 

 

19


 

Key Updates on our Vaccine Program

On November 1, 2022, we announced a strategic collaboration with CSL Seqirus, one of the world’s leading influenza vaccine providers, for the development, manufacture, and global commercialization of self-amplifying mRNA vaccines. CSL Seqirus is part of CSL Limited.

The collaboration combines CSL Seqirus’ established global vaccine commercial and manufacturing infrastructure with Arcturus’ manufacturing expertise and innovative STARR™ self-amplifying mRNA vaccine and LUNAR® delivery platform technologies. Arcturus' manufacturing expertise and innovative STARR™ self-amplifying mRNA vaccine and LUNAR® delivery platform technologies have enabled the Company’s low dose, lyophilized and durable self-amplifying mRNA vaccines against COVID.

Summary of CSL Seqirus Collaboration

Under the terms of the agreement, CSL Seqirus will receive exclusive global access to Arcturus’ technology for vaccines against SARS-CoV-2 (COVID-19), influenza and three other globally prevalent respiratory infectious diseases. Specifically, the Collaboration Agreement grants CSL Seqirus a license to Arcturus’ STARR mRNA technology and LUNAR lipid-mediated delivery, as well as mRNA drug substance and drug product manufacturing expertise. CSL Seqirus will also receive global non-exclusive access to Arcturus’ intellectual property rights in the field of pandemic preparedness (i.e., pathogens identified as priority diseases by the World Health Organization), with the right to convert to an exclusive license. CSL Seqirus will lead manufacturing scale up and commercialization of approved vaccines. The collaboration plans to advance our current LUNAR-COV19 and LUNAR-FLU vaccine programs, as well as three other globally prevalent respiratory infectious diseases.

Arcturus will receive $200 million upfront and is eligible to receive over $1.3 billion in development milestones and over $3 billion in commercial milestones. In addition, the Company is eligible to receive a 40% net profit share for COVID vaccine products and up to low double-digit royalties for vaccines against flu and three other respiratory pathogens.
 

Arcturus will receive mid-single-digit royalties of any Advance Purchase Agreement (APAs) contracts consummated by CSL Seqirus with government and related entities that use Arcturus technology.
 

Arcturus will also receive up to low double-digit royalties on sales for vaccines developed with Arcturus technology for use against pathogens listed in the World Health Organization (WHO) Blueprint List of Priority Diseases or declared a Public Health Emergency of International Concern (PHEIC) as part of Seqirus’ pandemic preparedness efforts.

Key Updates on Arcturus-Owned mRNA Therapeutic Development Candidates

The following chart represents our current pipeline of Arcturus-Owned mRNA Therapeutic Candidates:

 

img265319727_1.jpg 

 

LUNAR-OTC/ARCT-810 - Our rare disease program for ornithine transcarbamylase (OTC) deficiency is continuing to advance. With the increased availability of COVID-19 vaccines and the corresponding reduction of restrictions, there was a significant uptick in recruitment and enrollment activity for the Phase 1b ascending-dose study of ARCT-810 in 12 adults with OTC deficiency. Dosing of the first, second and third cohorts (0.2 mg/kg, 0.3 mg/kg and 0.4mg/kg) has completed, and the fourth cohort (0.5 mg/kg) is being added to the study. In addition, health authorities in the UK, Belgium, Sweden and Spain have approved a randomized, double-blind, placebo-controlled, nested single and multiple ascending dose Phase 2 study of ARCT-810 in 24 adolescent and adult patients with OTC-deficiency. Screening has begun and dosing is expected to begin in Q4 2022. On July 18, 2022, Orphan Drug Designation was granted in the EU by the European Commission based on a positive opinion issued by the EMA.
LUNAR-CF/ARCT-032 – Our preclinical program for cystic fibrosis is being supported in part by the Cystic Fibrosis Foundation. Results from preclinical studies demonstrate robust protein expression in respiratory epithelium treated with

20


 

LUNAR-mRNA in vitro and in vivo. Further, CF human bronchial epithelial cells treated with ARCT-032 in vitro demonstrate restoration of CFTR activity. Nonclinical studies also support advancement of ARCT-032 into clinical development. We expect to file an application for a first-in-human study for ARCT-032, our mRNA therapeutic candidate for CF, by year end.

 

Key Updates on our Research and Platform Activities

We continue to conduct exploratory platform development activities, including the evaluation of genome editing, and new targeting approaches, where our LUNAR® and STARR™ platforms could potentially be useful for identification and development of additional products for our portfolio.

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, 2021. 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.

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, royalties on future sales, consulting fees and payments for technology transfers. The following table summarizes our total revenues for the periods indicated (in thousands):

 

 

 

Three Months Ended September 30,

 

 

2021 to 2022

(in thousands)

 

2022

 

 

2021

 

 

$ change

 

 

% change

Revenue

 

$

13,369

 

 

$

2,437

 

 

$

10,932

 

 

*

 

 

 

Nine Months Ended September 30,

 

 

2021 to 2022

(in thousands)

 

2022

 

 

2021

 

 

$ change

 

 

% change

Revenue

 

$

45,706

 

 

$

6,565

 

 

$

39,141

 

 

*

* Greater than 100%

 

Revenue increased by $10.9 million during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. The increase in revenue primarily relates to an increase in revenue of $10.6 million related to the agreement with Vinbiocare.

Revenue increased by $39.1 million during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. The increase in revenue primarily relates to an increase in revenue of $26.2 million related to the agreement with Vinbiocare and an increase of $12.5 million related to the recognition of reservation fees from the Israeli MOH.

 

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

 

 

 

Three Months Ended September 30,

 

 

2021 to 2022

 

 

Nine Months Ended September 30,

 

 

2021 to 2022

 

(in thousands)

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net

 

$

37,688

 

 

$

45,398

 

 

$

(7,710

)

 

 

-17.0

%

 

$

120,770

 

 

$

141,127

 

 

$

(20,357

)

 

 

-14.4

%

General and administrative

 

 

12,488

 

 

 

10,860

 

 

 

1,628

 

 

 

15.0

%

 

 

34,211

 

 

 

30,645

 

 

 

3,566

 

 

 

11.6

%

Total

 

$

50,176

 

 

$

56,258

 

 

$

(6,082

)

 

 

-10.8

%

 

$

154,981

 

 

$

171,772

 

 

$

(16,791

)

 

 

-9.8

%

 

 

21


 

Research and Development Expenses, net

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

 

 

 

Three Months Ended September 30,

 

 

2021 to 2022

 

 

Nine Months Ended September 30,

 

 

2021 to 2022

 

(in thousands)

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

External pipeline development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LUNAR-COVID, net

 

$

16,018

 

 

$

29,392

 

 

$

(13,374

)

 

 

-45.5

%

 

$

60,774

 

 

$

85,790

 

 

$

(25,016

)

 

 

-29.2

%

LUNAR-OTC, net

 

 

2,063

 

 

 

1,478

 

 

 

585

 

 

 

39.6

%

 

 

6,471

 

 

 

6,631

 

 

 

(160

)

 

 

-2.4

%

Early stage programs

 

 

2,801

 

 

 

727

 

 

 

2,074

 

 

 

285.3

%

 

 

7,031

 

 

 

3,601

 

 

 

3,430

 

 

 

95.3

%

Discovery technologies

 

 

3,680

 

 

 

3,708

 

 

 

(28

)

 

 

-0.8

%

 

 

8,287

 

 

 

17,259

 

 

 

(8,972

)

 

 

-52.0

%

External platform development expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Personnel related expenses

 

$

11,013

 

 

$

8,719

 

 

$

2,294

 

 

 

26.3

%

 

$

31,862

 

 

$

24,191

 

 

$

7,671

 

 

 

31.7

%

Facilities and equipment expenses

 

 

2,113

 

 

 

1,374

 

 

 

739

 

 

 

53.8

%

 

 

6,345

 

 

 

3,655

 

 

 

2,690

 

 

 

73.6

%

Total research and development expenses, net

 

$

37,688

 

 

$

45,398

 

 

$

(7,710

)

 

 

-17.0

%

 

$

120,770

 

 

$

141,127

 

 

$

(20,357

)

 

 

-14.4

%

 

Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies and clinical trials performed by contract research organizations, clinical and regulatory consultants, personnel related expenses, facility related expenses and laboratory supplies related to conducting research and development activities. Research and development expense was $37.7 million for the three months ended September 30, 2022, respectively, compared with $45.4 million in the comparable period last year, primarily reflecting decreased manufacturing costs of $10.9 million offset by an increase of $2.3 million in personnel related expenses and an increase of facilities expense of $0.7 million. Research and development expense was $120.8 million for the nine months ended September 30, 2022, respectively, compared with $141.1 million in the comparable period last year, primarily attributable to decreases in clinical and manufacturing costs of $27.3 million and lab supplies of $4.0 million, offset by increases in personnel costs of $7.7 million and facilities and equipment costs of $2.7 million and a decrease in contra research and development expenses $1.4 million. We expect that our research and development efforts and associated costs will increase and continue to be substantial over the next several years as our pipeline progresses.

Early stage programs represent programs that are in the pre-clinical or Phase 1 clinical stage and may be partnered or unpartnered, including the CF program. Discovery technologies represents our efforts to expand our product pipeline and are primarily related to pre-partnered studies and new capabilities assessment. For several of our programs, the activities are part of our collaborative and other relationships and the expenses may be partially offset with funds that have been awarded to the Company. The expenses primarily consist of external manufacturing costs, lab supplies, equipment, and consulting and professional fees. Both early stage programs and discovery technologies expenses are expected to steadily increase over the coming years.

Personnel related expenses primarily consist of employee salaries and benefits, share-based compensation and consultants and are expected to continue to increase in the near future as we continue increase headcount to meet the needs of our external pipeline, platform and clinical trial efforts. Additionally, personnel related expenses will continue to rise as we increase salaries in line with increases in the market rates in order to retain our employees.

Facilities and equipment expenses continue to increase as we expand. The nine months ended September 30, 2022 includes increased rent and associated costs related to a new facility we took possession of in April 2022. Facilities and equipment expenses are expected to increase in the near term due to increased rent expense related to our new facility.

General and Administrative Expenses

General and administrative expenses primarily consist of salaries and related benefits for our executive, administrative, legal and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses. General and administrative expense was $12.5 million and $34.2 million for the three and nine months ended September 30, 2022, respectively, compared with $10.9 million and $30.6 million in the comparable periods last year. The increases resulted primarily from personnel expense due to increased headcount and salaries, as well as increased rent expense associated with the new facility.

22


 

Finance (expense) income, net

 

 

 

Three Months Ended September 30,

 

 

2021 to 2022

 

 

Nine Months Ended September 30,

 

 

2021 to 2022

 

(in thousands)

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

Interest income

 

$

444

 

 

$

192

 

 

$

252

 

 

 

131.3

%

 

$

766

 

 

$

569

 

 

$

197

 

 

 

34.6

%

Interest expense

 

 

(765

)

 

 

(711

)

 

 

(54

)

 

 

7.6

%

 

 

(2,211

)

 

 

(1,966

)

 

 

(245

)

 

 

12.5

%

Total

 

$

(321

)

 

$

(519

)

 

$

198

 

 

 

-38.2

%

 

$

(1,445

)

 

$

(1,397

)

 

$

(48

)

 

 

3.4

%

Interest income is generated on cash and cash equivalents. The increases in interest income for the three and nine months ended September 30, 2022 as compared to the prior year periods were primarily a result of increased interest rates. Interest expense was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank and the Singapore Loan and was relatively flat for the three and nine months ended September 30, 2022 as compared to the prior year periods.

Other income and expense

 

 

Three Months Ended September 30,

 

 

2021 to 2022

 

 

Nine Months Ended September 30,

 

 

2021 to 2022

 

(in thousands)

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

 

2022

 

 

2021

 

 

$ change

 

 

% change

 

Gain (loss) from equity-method investment

 

$

 

 

$

(250

)

 

$

250

 

 

 

-100.0

%

 

$

(515

)

 

$

670

 

 

$

(1,185

)

 

*

 

Gain from foreign currency

 

 

1,862

 

 

 

506

 

 

 

1,356

 

 

*

 

 

 

3,237

 

 

 

923

 

 

 

2,314

 

 

*

 

Total

 

$

1,862

 

 

$

256

 

 

$

1,606

 

 

*

 

 

$

2,722

 

 

$

1,593

 

 

$

1,129

 

 

 

70.9

%

* Greater than 100%

Other income and expense items relate to gains and losses from foreign currency transactions and from equity-method investments. We recorded foreign currency gains of $1.9 million and $3.2 million for the three and nine months ended September 30, 2022, respectively, compared with gains of $0.5 million and $0.9 million in the comparable periods last year which is primarily attributable to the Singapore Loan.

We recorded no gain or loss for the three months ended September 30, 2022 and a loss of $0.5 million for the nine months ended September 30, 2022, compared with a $0.3 million loss and $0.7 million gain in the comparable periods last year in connection with our equity-method investment in Vallon Pharmaceuticals, Inc.

Off-balance sheet arrangements

Through September 30, 2022, 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 September 30, 2022, 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 September 30, 2022, we had $237.7 million in unrestricted cash and cash equivalents.

During fiscal year 2021, the Company received a term loan of $46.6 million from Economic Development Board of the Republic of Singapore ("EDB"). The Company is in discussions with EDB regarding the loan and is expecting that it will pay back approximately $15.7 million during the first quarter of 2023, representing funds that were not spent on the original ARCT-021 COVID-19 vaccine candidate. The Company has notified EDB that the ARCT-021 program will not continue and has asked that the remaining portion of the loan related to the ARCT-021 program be forgiven at time the amendment is signed, which is expected during the fourth quarter of 2022.

Additionally, during 2021, the Company received an upfront payment of $40.0 million from Vinbiocare to fund the technology transfer and build out of a mRNA drug product manufacturing facility in Vietnam during 2021, in connection with entering into the Technology License and Technical Support Agreement and the Framework Drug Substance Supply Agreement, each signed July 29, 2021 and effective July 30, 2021 (collectively, the “License & Supply Agreements”). In October 2022, in association with the termination of the existing License and Supply Agreements, Vinbiocare and the Company signed a new Study Support Agreement which will fund certain parts of the Vietnam clinical trial. As such, the Company has reserved a portion of the original $40.0 million upfront payment within accrued expenses that will be paid over the next two years to Vinbiocare as part of the new Study Support Agreement.
 

23


 

Loan and Security Agreement

On October 12, 2018, we entered into a Loan and Security Agreement with Western Alliance Bank (the “Loan Agreement”). Pursuant to the Third Amendment, the Bank agreed to increase the Loan Agreement to $15.0 million on October 30, 2019. The Loan Agreement bears interest at a floating rate ranging from 1.25% to 2.75% above the prime rate. The amendment further provides that the Loan Agreement has a maturity date of October 30, 2023. The interest-only period ended on August 1, 2022,ad and we began making payments towards the principal balance.

Manufacturing Support Agreement

On November 7, 2020, our wholly-owned subsidiary, Arcturus Therapeutics, Inc., entered into a Manufacturing Support Agreement (the “Support Agreement”) with the Economic Development Board of the Republic of Singapore (the “EDB”). Pursuant to the Support Agreement, the EDB agreed to make a term loan (the “Singapore Loan”) of S$62.1 million to the Company, subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (ARCT-021). The Singapore Loan accrues interest at a rate of 4.5% per annum calculated on a daily basis. 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 EDB agreed to an extension of the reconciliation period to March 31, 2022, with unused funds as of such date returned to the EDB within 30 days following the completion of the customary audit of the Singapore Loan. This audit is scheduled to be completed during the fourth quarter of 2022. During the third quarter of 2022, we reported a portion of the Singapore Loan as current to reflect a potential principal repayment of approximately S$20.9 million ($15.7 million) in fiscal year 2022 based on amounts not used towards the manufacture of ARCT-021. We expect to refund this portion in the first quarter of fiscal year 2023.

The Singapore Loan was initially recorded as long-term debt at $46.6 million, the amount of cash proceeds at the time we received the funding. During the first quarter of 2022, accrued interest of $1.9 million related to 2021 was added to the principal debt balance in accordance with the terms of the Support Agreement and the balance was adjusted to reflect the current exchange rate resulting in an increase in the debt balance to $47.8 million. We recorded a net foreign currency transaction gain of $3.0 million for the nine months ended September 30, 2022 compared to a net foreign currency transaction gain of $0.9 million for the nine months ended September 30, 2021. For the three and nine months ended September 30, 2022, we recorded interest expense and a corresponding liability of $0.5 million and $1.6 million, respectively, compared to interest expense and a corresponding liability of $0.5 million and $1.4 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, we were in compliance with all covenants under the Singapore Loan and related commitments.

Vinbiocare Agreement

During 2021 we entered into the Technology License and Technical Support Agreement and the Framework Drug Substance Supply Agreement with Vinbiocare, a member of Vingroup Joint Stock Company (collectively, the “License & Supply Agreements”), whereby we would provide technical expertise and support services to Vinbiocare to assist in the build out of a mRNA drug product manufacturing facility in Vietnam. We received an upfront payment in aggregate of $40.0 million as part of the License and Supply Agreements. In October 2022, in association with the termination of the License and Supply Agreements, we signed the Study Support Agreement with Vinbiocare which continues Vinbiocare’s clinical obligations and reserved a portion of the original $40 million upfront payment received from the License and Supply Agreements to be paid over the future periods.
 

The Study Support Agreement requires us to pay to Vinbiocare certain limited payments, including upon the occurrence of specified events through the first quarter of 2025. Vinbiocare is also eligible to receive a single digit percentage of amounts received by Arcturus on net sales, if any, of ARCT-154 (or next-generation COVID vaccine) up to a capped amount.
 

We have reclassified a portion of the $40 million upfront payment received from Vinbiocare under the License and Supply Agreements from deferred revenue to short-term and long-term liabilities, based on the anticipated timing of the payments to Vinbiocare by the Company under the Study Support Agreement, and removed that portion from the transaction price of the License and Supply Agreements. In association with the termination of the License and Supply Agreements, we have concluded that the Company has no remaining performance obligations as of September 30, 2022 related to the License and Supply Agreements, and therefore has recognized the remaining transaction price of $4.2 million as revenue during the period ended September 30, 2022. The revenue recognized in 2022 relates to the delivery of drug substance, consulting to support the build out of the manufacturing facility and technical transfer and consulting to support the phase 3 clinical trial.

General Financial Resources

We have a current unrestricted cash and cash equivalents balance of $237.7 million. On November 1, 2022, the Company entered into a collaboration and license agreement with CSL Seqirus and will receive an upfront payment of $200 million and will be eligible to potentially receive development milestones totaling more than $1.3 billion if all products are registered in licensed fields. We will also be entitled to potentially receive up to $3 billion in commercial milestones based on “net sales” of vaccines in the various fields. In addition, we are entitled to receive a 40% share of net profits from COVID-19 vaccine sales and up to low double digit

24


 

royalties of annual net sales for vaccines against influenza and the other three specified infectious disease pathogens, as well as royalties on revenues from vaccines that may be developed for pandemic preparedness. We expect to utilize our remaining funds on (i) the continued Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (ii) advances to our LUNAR-CF program toward submission of a CTA during the fourth quarter of 2022 and (iii) continued expansion of our platform and other general administrative activities.

Our future capital requirements are difficult to forecast and will depend on many factors that are out of our control. 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.

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. 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.

Funding Requirements

We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin commercialization of our products. As a result, we will require additional capital to fund our operations in order to support our long-term plans. We believe that our current cash position will be sufficient to meet our anticipated cash requirements through at least the next twelve months, assuming, among other things, no significant unforeseen expenses, continued funding from partners at anticipated levels and our payment obligations continuing to follow the current maturity schedule under our long-term credit facility referenced in Note 5. 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, 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 development of our LUNAR-COV19 and LUNAR-FLU vaccine candidates;
the achievement of milestones under our strategic alliance agreements;
maintaining and/or expanding our manufacturing network and capabilities;
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
market disruptions, including significant volatility in the financial markets caused by the Russia/Ukraine conflict.

25


 

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with GAAP. As such, we make certain estimates, judgments 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 reported 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, 2021.

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 the 2021 Annual Report.

Item 3. Quantitative and Qualitative 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. Foreign exchange market risks relate to the grants and loan from the Singapore Economic Development Board which is discussed in this Quarterly Report in “Notes to Condensed Consolidated Financial Statements, Note 1. Description of Business.” 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. Due 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.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal executive officer, our principal financial officer and our principal accounting officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded that as of September 30, 2022, the Company’s disclosure controls and procedures were effective at the reasonable assurance level, and we believe the condensed consolidated financial statements included in this Form 10-Q for the quarterly periods ended September 30, 2022 fairly present, in all material respects, our financial position, results of operations, comprehensive loss, statements of stockholders’ equity and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act, our management, including our principal executive officer, our principal financial officer and our principal accounting officer, conducted an evaluation of the internal control over financial reporting to determine whether any other changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that there were no changes in our internal controls over financial reporting during the periods covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

From time to time, we may be involved in various legal proceedings and subject to claims that arise in the ordinary course of business, including those related to governmental inquiries, intellectual property and commercial relationships. The subject matter of any such legal proceedings or claims are or will be highlight complex and subject to substantial uncertainties. The outcome of any such proceedings or claims, regardless of the merits, are and will be inherently uncertain; therefore, assessing the likelihood of loss and any estimated damages is difficult and subject to considerable judgment.

Item 1A. Risk Factors.

Our business is subject to various risks, including those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which we strongly encourage you to review. Other than as set forth below, there have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Commission on March 1, 2022.

U.S. Government agencies have special contracting authority that gives them the ability to terminate and/or modify its contracts.


On August 31, 2022, the Company entered into a cost reimbursement contract (the “Contract”) with the Biomedical Advanced Research and Development Authority (“BARDA”) of the U.S. Department of Health and Human Services to support the development of a low-dose pandemic influenza candidate based on Arcturus’ proprietary self-amplifying messenger RNA-based vaccine platform.

The Contract, as with most U.S. Government contracts, is subject to audit, and contains termination provisions allowing the government to terminate all or part of the contract at its sole discretion, which will subject us to additional risks. These risks include the ability of the U.S. Government unilaterally to:



• preclude us, either temporarily or for a set period of time, from receiving new contracts or extending our existing or future contracts based on violations or suspected violations of laws or regulations;

• terminate our contract, either for the convenience of the government (at the government’s sole discretion, for example, if funds become unavailable or the government no longer wants the work) or for default (for failing to perform in accordance with the contract schedule and terms);

• revise the scope and value of our contract and/or revise the timing for work to be performed;

• audit and object to our contract-related costs and fees, including allocated indirect costs;

• control and potentially prohibit the export of our products, if and when developed;

• claim rights to intellectual property, including products, that may be developed under the contract; and

• add or remove the terms and conditions in our contract.


 

 

Termination-for-convenience provisions generally enable us to recover only our costs incurred or committed, settlement expenses, and profit on the work completed prior to termination. A contractor’s rights under a termination for convenience are limited to an adjustment of profit and, with the contracting officer’s concurrence, a reduction in the estimated cost. Under the general termination for convenience procedures, a partial termination is treated as a full termination when (i) the terminated portion is clearly severable from the balance of the contract or (ii) when contract performance is virtually complete or performance of the continued portion of the contract is only on subsidiary items or is otherwise not substantial. Termination-for-default provisions do not permit these recoveries and could make us liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.
 

Our business is subject to audit by the U.S. Government, and a negative audit could adversely affect our business.

 

27


 

Several U.S. Government agencies, such as the Defense Contract Audit Agency (the “DCAA”), routinely audit and investigate government contractors. These agencies review, among other things, a contractor’s performance under its contracts, incurred costs, cost structure and compliance with applicable laws, regulations and standards.

 

The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:

• termination of contracts;

• forfeiture of profits;

• suspension of payments;

• fines; and

• suspension or prohibition from conducting business with the U.S. Government.

 

In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.


 

Effectiveness of our commercial arrangement with CSL Seqirus remains subject to regulatory approval, and failure to timely obtain such approval could negatively affect our future business and financial results.

 

Effectiveness of the Collaboration and License Agreement with CSL Seqirus is conditioned on the expiration of the waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976 (“HSR”). There is no assurance that we will receive the necessary HSR approval, and if HSR approval is not obtained, the Collaboration and License Agreement will terminate in accordance with its terms. Such termination could materially adversely affect our business, financial results, financial condition, and stock price.

 

Data from our ongoing Phase 1/2/3 clinical trials of ARCT-154 in Vietnam may not provide sufficient evidence to the Vietnamese regulatory authorities, the US FDA or regulatory authorities in other jurisdictions that it is sufficiently safe and effective to achieve any marketing approval (including any emergency use authorization) or to have a plausible clinical path to an approval.

The completion of these clinical trials in Vietnam and their review by Vietnamese regulatory authorities may be delayed substantially because of a recently exposed scandal involving COVID-19 testing kits. The scandal has resulted in expulsions of high-level officials in the Ministry of Health as well as Center for Disease Control directors & health officials in 14 provinces. Clinical trial results are inherently uncertain, and a significant portion of our potential success and business prospects currently depend on our COVID-19 vaccine program. If we cannot demonstrate sufficient safety and efficacy and complete these clinical trials on a timely basis, we likely will have missed a substantial market opportunity for COVID-19 vaccines, after dedicating significant efforts and financial resources to this program, and our commercial relationships may be materially adversely affected. Data from this trial is crucial for the success of the COVID-19 vaccine program.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

29


 

Item 6. Exhibits.

 

Exhibit Index

 

Exhibit Number

 

Description

 

 

3.1

 

Certificate of Incorporation. Incorporated by reference to Annex B to the proxy statement/prospectus which forms part of the Registration Statement on Form S-4 filed on March 18, 2019 (File No. 333-230353).

 

 

 

3.2

 

Certificate of Amendment, dated November 25, 2020. Incorporated by reference to Exhibit 3.1 to Form 8-K filed on November 25, 2020 (File No. 001-38942).

 

 

 

3.3

 

Bylaws of Arcturus Therapeutics Holdings Inc. Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-3, filed with the SEC on May 8, 2020 (File No. 333-238139).

 

 

 

4.1

 

Description of Registrant’s Securities. Incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed on February 28, 2022 (File No. 001-38942).

 

 

 

10.1†

 

Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 16, 2020 (File No. 001-38942).

 

 

 

10.2†

 

Amended and Restated 2019 Omnibus Equity Incentive Plan. Incorporated by reference Exhibit 4.3 to the Registration Statement on Form S-8 filed on August 5, 2020 (File No. 333-240397).

 

 

 

10.3**

 

Loan and Security Agreement, dated October 12, 2018, by and between Western Alliance Bank and Arcturus Therapeutics, Inc. Incorporated by reference to Exhibit 10.1 to the Company’s Report of Foreign Private Issuer on Form 6-K filed on October 15, 2018 (File No. 001-35932).

 

 

 

10.4**

 

Amended and Restated Amendment to Development and Option Agreement, dated as of September 28, 2018, by and between CureVac AG and Arcturus Therapeutics Inc. Incorporated by reference to Exhibit 99.2 to the Company’s Report of Foreign Private Issuer on Form 6-K filed on October 1, 2018 (File No. 001-35932).

 

 

 

10.5**

 

Research Collaboration and License Agreement, by and between Arcturus Therapeutics, Inc. and Janssen Pharmaceuticals, Inc., dated October 18, 2017. Incorporated by reference to Exhibit 4.7 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.6**

 

Research and Exclusive License Agreement, by and between Arcturus Therapeutics, Inc. and Synthetic Genomics, Inc., effective October 24, 2017. Incorporated by reference to Exhibit 4.8 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.7**

 

Research Agreement, by and between Arcturus Therapeutics, Inc. and Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, effective December 6, 2016, as amended December 21, 2017. Incorporated by reference to Exhibit 4.9 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.8**

 

Research Collaboration and License Agreement, by and between Arcturus Therapeutics, Inc. and Ultragenyx Pharmaceutical Inc., entered into as of October 26, 2015, as amended October 17, 2017 and April 20, 2018. Incorporated by reference to Exhibit 4.10 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.9**

 

Third Amendment to Research Collaboration and License Agreement, by and between Arcturus Therapeutics, Inc. and Ultragenyx Pharmaceutical Inc., effective June 18, 2019. Incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 20, 2019 (File No. 001- 38942).

 

 

 

10.10**

 

Letter Agreement, by and between Arcturus Therapeutics, Inc. and the Cystic Fibrosis Foundation, dated May 16, 2017. Incorporated by reference to Exhibit 4.11 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.11**

 

Amendment No. 2 to Letter Agreement, by and between Arcturus Therapeutics, Inc. and the Cystic Fibrosis Foundation, dated August 1, 2019. Incorporated by reference to Exhibit 10.16 to Form 10-Q filed on August 14, 2019.

 

 

 

10.12**

 

Development and Option Agreement, by and between Arcturus Therapeutics, Inc. and CureVac AG, dated January 1, 2018, as amended May 3, 2018. Incorporated by reference to Exhibit 4.12 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.13**

 

Third Amendment to Development and Option Agreement, by and between Arcturus Therapeutics, Inc. and CureVac AG, dated July 26, 2019. Incorporated by reference to Exhibit 10.20 to Form 10-Q filed on August 14, 2019 (File No. 001-38942).

 

30


 

 

 

 

10.14**

 

License Agreement, by and between Arcturus Therapeutics, Inc., as successor-in-interest to Marina Biotech, Inc., and Protiva Biotherapeutics Inc., dated as of November 28, 2012. Incorporated by reference to Exhibit 4.14 to Form 20-F/A filed on July 10, 2018 (File No. 001-35932).

 

 

 

10.15**

 

Patent Assignment and License Agreement, by and between Arcturus Therapeutics, Inc. and Marina Biotech, Inc., dated as of August 9, 2013. Incorporated by reference to Exhibit 4.15 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.16

 

Share Exchange Agreement, dated as of February 11, 2019, by and between Arcturus Therapeutics Ltd. and Arcturus Therapeutics Holdings Inc. Incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on March 18, 2019 (File No. 001-35932).

 

 

 

10.17**

 

Amended and Restated Joint Venture, Research Collaboration and License Agreement, dated as of July 14, 2018 by and between Arcturus Therapeutics, Inc. and Providence Therapeutics, Inc. Incorporated by reference to Exhibit 10.14 to the Company’s Amendment No. 1 to Annual Report on Form 10-K for the year ended December 31, 2018 filed on April 10, 2019 (File No. 001-35932).

 

 

 

10.18**

 

Research Collaboration Agreement, dated as of March 8, 2019 by and between Arcturus Therapeutics, Inc. and Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited. Incorporated by reference to Exhibit 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on March 18, 2019 (File No. 001-35932).

 

 

 

10.19

 

Lease Agreement, by and between Arcturus Therapeutics, Inc. and ARE-SD Region No. 44, LLC, dated October 4, 2017. Incorporated by reference to Exhibit 4.6 to Form 20-F filed on May 14, 2018 (File No. 001-35932).

 

 

 

10.20

 

First Amendment to Lease Agreement, by and between Arcturus Therapeutics Holdings Inc. and ARE-SD Region No. 44, LLC dated February 1, 2020. Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 16, 2020 (File No. 001-38942).

 

 

 

10.21**

 

Acceptance Letter, dated March 4, 2020, by and between Arcturus Therapeutics Holdings Inc. and the Economic Development Board of Singapore. Incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed on March 16, 2020 (File No. 001-38942).

 

 

 

10.22**

 

Supply Agreement, dated August 17, 2020, by and between Arcturus Therapeutics, Inc. and the Israeli Ministry of Health. Incorporated by reference to Exhibit 10.32 to Quarterly Report on Form 10-Q filed on November 9, 2020 (File No. 001-38942).

 

 

 

10.23**

 

Manufacturing Support Agreement, dated November 7, 2020, by and between Arcturus Therapeutics Holdings Inc. and the Economic Development Board of Singapore. Incorporated by reference to Exhibit 10.33 to Quarterly Report on Form 10-Q filed on November 9, 2020 (File No. 001-38942).

 

 

 

10.24

 

Fourth Amendment to Loan and Security Agreement, dated December 1, 2020, by and between Arcturus Therapeutics, Inc. and Western Alliance Bank. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 7, 2020 (File No. 001-38942).

 

 

 

10.25†

 

2020 Employee Stock Purchase Plan. Incorporated by reference to Exhibit 4.3 to Form S-8 filed on August 5, 2020 (File No. 333-240392).

 

 

 

10.26

 

Second Amendment to Lease, by and between Arcturus Therapeutics, Inc. and ARE-SD Region No. 44, LLC, dated November 13, 2020. Incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 1, 2020 (File No. 001-38942).

 

 

 

10.27

 

Third Amendment to Lease, by and between Arcturus Therapeutics, Inc. and ARE-SD Region No. 44, LLC, dated February 25, 2021. Incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 1, 2020 (File No. 001-38942).

 

 

 

10.28

 

Arcturus Therapeutics Holdings Inc. Severance Policy for Executives. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 26, 2021 (File No. 001-38942).

 

 

 

10.29

 

Technology License and Technical Support Agreement, signed July 29, 2021 and effective July 30, 2021, by and between Arcturus Therapeutics, Inc. and Vinbiocare Research and Manufacture Joint Stock Company. Incorporated by reference to Exhibit 10.32 to Quarterly Report on Form 10-Q filed on August 10, 2021 (File No. 001-38942).

 

 

 

 

31


 

10.30

 

Framework Drug Substance Supply Agreement, signed July 29, 2021 and effective July 30, 2021, by and between Arcturus Therapeutics, Inc. and Vinbiocare Research and Manufacture Joint Stock Company. Incorporated by reference to Exhibit 10.33 to Quarterly Report on Form 10-Q filed on August 10, 2021 (File No. 001-38942).

 

 

 

10.31

 

Fifth Amendment to Loan and Security Agreement, dated October 27, 2021, by and between Arcturus Therapeutics, Inc. and Western Alliance Bank. Incorporated by reference to Exhibit 10.34 to Form 10-Q filed on November 9, 2021 (File No. 001-38942).

 

 

 

10.32

 

Lease, by and between Arcturus Therapeutics, Inc. and TPSC IX, LLC, dated September 29, 2021. Incorporated by reference to Exhibit 10.35 to Form 10-Q filed on November 9, 2021 (File No. 001-38942).

 

 

 

10.33†

 

Arcturus Therapeutics Holdings Inc. 2021 Inducement Equity Incentive Plan. Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 filed on October 20, 2021 (File No. 333-260391).

 

 

 

10.34

 

Sixth Amendment to Loan and Security Agreement, dated April 19, 2022, by and between Arcturus Therapeutics, Inc. and Western Alliance Bank. Incorporated by reference to Exhibit 10.36 to Form 10-Q filed on May 8, 2022 (File No. 001-38942).

 

 

 

10.35†

 

Amended and Restated 2019 Omnibus Equity Incentive Plan, as amended. Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 filed on June 30, 2022.

 

 

 

10.36* **

 

Cost Reimbursement Contract dated August 31, 2022, by and between Arcturus Therapeutics Holdings Inc. and Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services.

 

 

 

10.37**

 

Study Support Agreement, dated October 31, 2022, by and between Arcturus Therapeutics, Inc. and Vinbiocare Research and Manufacture Joint Stock Company. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on November 4, 2022 (File No. 001-38942).

 

 

 

10.38* **

 

Collaboration and License Agreement, dated November 1, 2022, by and between Arcturus Therapeutics Holdings Inc. and CSL Limited.

 

 

 

31.1*

 

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.

 

 

 

31.2*

 

Certification by Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended.

 

 

 

32.1*

 

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2*

 

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101*

 

The following financial statements and footnotes from the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2022 formatted in Inline Extensible Business Reporting Language (Inline XBRL):

 

 

101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

101.SCH Inline XBRL Taxonomy Extension Schema

 

 

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB Inline XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

* Filed herewith.

** Certain confidential portions of this exhibit have been redacted from the publicly filed document because such portions are (i) not material and (ii) would be competitively harmful of publicly disclosed.

† Management compensatory plan, contract or arrangement.

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ARCTURUS THERAPEUTICS HOLDINGS INC.

 

 

Date: November 9, 2022

By:

/s/ Andy Sassine

 

 

Andy Sassine

 

 

Chief Financial Officer

 

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