Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT) Q3 2020 Results Earnings Conference Call November 9, 2020 4:30 PM ET Company Participants Neda Safarzadeh - Head of Investor Relations, Public Relations & Marketing Joseph Payne - President & Chief Executive Officer Andy Sassine - Chief Financial Officer Steve Hughes - Chief Development Officer Conference Call Participants Seamus Fernandez - Guggenheim Madhu Kumar - Baird Yasmeen Rahimi - Piper Sandler Yigal Nochomovitz - Citigroup Steve Seedhouse - Raymond ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Common Stock, par value $0.001 per share ARCT The Nasdaq Stock Market LLC 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, 2020 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. (NASDAQ:ARCT) Q2 2020 Earnings Conference Call August 10, 2020 4:30 PM ET Company Participants Neda Safarzadeh - Head of Investor Relations, Public Relations & Marketing Joseph Payne - President & Chief Executive Officer Andy Sassine - Chief Financial Officer Steve Hughes - Chief Development Officer Conference Call Participants Seamus Fernandez - Guggenheim Madhu Kumar - Baird and Company Wangzhi Li - Ladenburg Ryan Deschner - Raymond James Justin Zelin - B. Riley Securit ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Common Stock, par value $0.001 per share ARCT The NASDAQ Stock Market LLC 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 June 30, 2020 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 | --- | --- | |----------------------------------- ...

Financial Data and Key Metrics Changes - For Q1 2020, Arcturus reported revenues of $2.6 million, a decline from $4.4 million in Q1 2019, primarily due to CureVac discontinuing its collaboration for the OTC program [22][23] - Total operating expenses increased to $12.1 million in Q1 2020 from $10.9 million in the same period of 2019, driven by costs associated with the OTC, CTA, IND preparations, and the COVID-19 vaccine program [23] - The net loss for Q1 2020 was approximately $9.8 million, or $0.67 per share, compared to a net loss of $6.9 million, or $0.68 per share, in the prior-year period [24] - Cash balance as of March 31, 2020, was $59.5 million, with an additional $75.5 million raised from a secondary offering and $5 million from a COVID-19 vaccine contract [24][25] Business Line Data and Key Metrics Changes - The primary revenue source remains from license fees and collaborative payments from pharmaceutical and biotech partners [22] - The COVID-19 vaccine program is a significant focus, with promising preclinical data indicating 100% seroconversion in animal studies at a single 2-microgram dose [9][10] Market Data and Key Metrics Changes - The company is preparing to initiate clinical trials for its COVID-19 vaccine in Singapore, with plans to expand geographically [13] - Manufacturing capacity has been increased through a partnership with Catalent, aiming to produce hundreds of millions of doses annually [14] Company Strategy and Development Direction - Arcturus is focused on developing a self-replicating mRNA COVID vaccine, LUNAR-COV19, which is differentiated from conventional mRNA vaccines [11][12] - The company plans to initiate clinical trials in the summer of 2020 and expand its manufacturing capabilities to meet anticipated demand [13][14] - The pipeline includes treatments for rare diseases, such as ARCT-810 for OTC deficiency, with clinical trials approved in the U.S. and New Zealand [16][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the impact of the COVID-19 pandemic on operations and emphasizes the importance of their role in the biopharma industry [8][9] - The company remains optimistic about the potential of its COVID-19 vaccine and the ongoing support from government agencies and foundations for vaccine stockpiling initiatives [25][26] Other Important Information - The company has received a $2 million grant from the CF foundation, which has helped offset increased expenses related to the cystic fibrosis program [23] - The anticipated clinical trial for the COVID-19 vaccine is expected to provide data quickly, with immunogenicity readouts coming within weeks of dosing [45] Q&A Session Summary Question: Follow-up on preclinical data and additional studies - Management confirmed that additional nonclinical data for the COVID vaccine program will be shared, including potential vaccine challenge studies [31][32] Question: Manufacturing capacity scaling - Management indicated that funding and clinical data would trigger scaling up manufacturing capacity, with Catalent significantly increasing current capabilities [34][35] Question: Timeline for dosing healthy volunteers in New Zealand - Management clarified that dosing would begin shortly after lockdown restrictions are lifted, with a quick screening process for healthy volunteers [38][39] Question: Evidence of OTC production in healthy volunteers - Management explained that while they cannot distinguish OTC produced from their RNA from normal OTC, they have seen increases in urea cycle activity in animal studies [41][42] Question: Size and duration of COVID-19 trials - The initial COVID-19 trial will involve 80 to 90 subjects, with subsequent trials being larger to meet regulatory safety requirements [55] Question: Protocols for healthy volunteers and OTC patients - Management detailed that both studies are single-dose, randomized, placebo-controlled trials, with different cohort sizes due to the rarity of the OTC condition [72][73] Question: Grant funding for COVID-19 - Management is working with the Singapore government for additional funding based on the success of the initial $10 million agreement [74][75]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited condensed consolidated financial statements for Arcturus Therapeutics Holdings Inc. and its subsidiaries, including balance sheets, statements of operations and comprehensive loss, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's business, accounting policies, and financial performance for the periods ended March 31, 2020 and December 31, 2019 [Condensed Consolidated Balance Sheets](index=2&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets show a decrease in total assets from $82.1 million at December 31, 2019, to $72.1 million at March 31, 2020, primarily driven by a reduction in cash and cash equivalents. Total liabilities also decreased slightly from $56.4 million to $55.1 million over the same period | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $59,471 | $71,353 | | Total current assets | $63,759 | $74,290 | | Total assets | $72,104 | $82,143 | | Total current liabilities | $21,650 | $21,324 | | Total liabilities | $55,122 | $56,351 | [Condensed Consolidated Statements of Operations and Comprehensive Loss](index=3&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Loss) For the three months ended March 31, 2020, the company reported a net loss of $9.8 million, an increase from $6.9 million in the prior-year period, primarily due to a decrease in collaboration revenue and an increase in operating expenses | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :--------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Collaboration revenue | $2,646 | $4,350 | | Research and development, net | $7,917 | $7,324 | | General and administrative | $4,191 | $3,534 | | Total operating expenses | $12,108 | $10,858 | | Loss from operations | $(9,462) | $(6,508) | | Net loss | $(9,777) | $(6,884) | | Net loss per share, basic and diluted | $(0.67) | $(0.68) | [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) Stockholders' equity decreased from $25.8 million at December 31, 2019, to $17.0 million at March 31, 2020, primarily due to the net loss incurred during the quarter, partially offset by share-based compensation and proceeds from stock option exercises | Metric | December 31, 2019 (in thousands) | March 31, 2020 (in thousands) | | :-------------------------------------- | :------------------------------- | :---------------------------- | | Total Stockholders' Equity (Balance) | $25,792 | $16,982 | | Net loss | — | $(9,777) | | Share-based compensation | — | $849 | | Issuance of common stock upon exercise | — | $118 | [Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The company experienced a net decrease in cash, cash equivalents, and restricted cash of $11.9 million for the three months ended March 31, 2020, primarily driven by $11.9 million used in operating activities, compared to a $5.5 million decrease in the prior-year period | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | $(11,858) | $(5,411) | | Net cash used in investing activities | $(142) | $(78) | | Net cash provided by financing activities | $118 | $0 | | Net decrease in cash, cash equivalents and restricted cash | $(11,882) | $(5,489) | | Cash, cash equivalents and restricted cash at end of the period | $59,578 | $31,327 | [Notes to Condensed Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes provide detailed explanations of the company's business, significant accounting policies, and specific financial statement line items, including collaboration revenue, fair value measurements, balance sheet details, debt, stockholders' equity, share-based compensation, income taxes, commitments and contingencies, related party transactions, and subsequent events [Note 1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies](index=7&type=section&id=Note%201.%20Description%20of%20Business,%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) Arcturus Therapeutics Holdings Inc. is a clinical-stage messenger RNA medicines company focused on infectious disease vaccines and rare diseases, utilizing its STARR technology and LUNAR delivery system, and became clinical-stage in April 2020 with FDA allowance for its ARCT-810 IND and New Zealand approval for a Phase 1 study - Arcturus Therapeutics Holdings Inc. is a clinical-stage messenger RNA (mRNA) medicines company[13](index=13&type=chunk) - Focuses on infectious disease vaccines using Self-Transcribing and Replicating RNA (STARR) technology and opportunities in liver and respiratory rare diseases[13](index=13&type=chunk) - Proprietary lipid nanoparticle delivery system, LUNAR, enables multiple nucleic acid medicines[13](index=13&type=chunk) - Became a clinical-stage company in April 2020 with FDA allowance for a Phase 1b study in OTC deficiency (ARCT-810) and CTA approval in New Zealand for a Phase 1 study[13](index=13&type=chunk)[58](index=58&type=chunk) - Awarded a grant of up to **S$14.0 million** (approx. **US$10 million**) from the Singapore Economic Development Board in March 2020 to co-develop a COVID-19 vaccine with Duke-NUS Medical School[13](index=13&type=chunk)[17](index=17&type=chunk)[50](index=50&type=chunk) - In April 2020, completed an underwritten public offering, raising approximately **$75.5 million** in net proceeds[17](index=17&type=chunk)[58](index=58&type=chunk) - The company operates and manages its business as one operating segment: research and development of medical applications for its nucleic acid-focused technology[18](index=18&type=chunk) [Note 2. Collaboration Revenue](index=9&type=section&id=Note%202.%20Collaboration%20Revenue) Collaboration revenue decreased by 39.2% to $2.6 million for the three months ended March 31, 2020, compared to $4.4 million in the prior-year period, primarily due to a $1.6 million decrease from the terminated CureVac OTC collaboration, with significant agreements remaining with Janssen, Ultragenyx, and CureVac | Collaboration Partner | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :-------------------- | :----------------------------------------------- | :----------------------------------------------- | | Janssen | $897 | $513 | | Ultragenyx | $911 | $1,388 | | CureVac | $309 | $1,894 | | Takeda and other | $529 | $555 | | **Total** | **$2,646** | **$4,350** | - Collaboration revenue decreased by **$1.7 million (-39.2%)** for the three months ended March 31, 2020, compared to the same period in 2019[63](index=63&type=chunk)[64](index=64&type=chunk) - The decrease is primarily due to a **$1.6 million** reduction in reimbursements from CureVac following the termination of the OTC collaboration in Q2 2019[63](index=63&type=chunk) - Janssen agreement (Oct 2017): Upfront payment of **$7.7M**, potential milestones of **$56.5M**, and low to mid-single digit royalties. Deferred revenue as of March 31, 2020, was **$5.9M**[30](index=30&type=chunk) - Ultragenyx agreement (Oct 2015, amended): **$27.9M** in upfront/exclusivity fees, potential milestones of **$138.0M**, and single-digit royalties. Amendment 3 (June 2019) increased targets and included an equity component. Deferred revenue as of March 31, 2020, was **$11.8M**[31](index=31&type=chunk)[32](index=32&type=chunk) - CureVac agreement (Jan 2018, amended): Potential milestones of **$14.0M** (rare disease) and **$23.0M** (non-rare disease), low single-digit royalties. Co-Development Agreement terminated in July 2019, with a **$4.0M** payment to Arcturus. Deferred revenue as of March 31, 2020, was **$3.0M**[33](index=33&type=chunk)[34](index=34&type=chunk) [Note 3. Fair Value Measurements](index=13&type=section&id=Note%203.%20Fair%20Value%20Measurements) The company measures fair value using a hierarchy (Level 1, 2, 3), with all assets measured at fair value on a recurring basis, primarily cash equivalents and money market funds, classified within Level 1 as of March 31, 2020 - Fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), Level 3 (unobservable inputs)[37](index=37&type=chunk) - As of March 31, 2020, all assets measured at fair value on a recurring basis (cash equivalents and money market funds) were classified within **Level 1**[37](index=37&type=chunk) [Note 4. Balance Sheet Details](index=13&type=section&id=Note%204.%20Balance%20Sheet%20Details) Prepaid expenses and other current assets increased significantly from $0.8 million to $1.9 million, while accrued liabilities rose from $7.1 million to $9.8 million, driven by increases in other accrued R&D expenses and the current portion of operating lease liability | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------------------------------- | :---------------------------- | :------------------------------- | | Prepaid expenses and other current assets | $1,937 | $758 | | Property and equipment, net | $2,571 | $2,349 | | Accrued liabilities | $9,775 | $7,134 | | - Accrued compensation | $1,635 | $1,608 | | - Other accrued R&D expenses | $4,745 | $2,750 | [Note 5. Debt](index=14&type=section&id=Note%205.%20Debt) The company has a $15.0 million term loan with Western Alliance Bank, maturing in October 2023 with interest-only payments until October 2021, and was in compliance with all covenants as of March 31, 2020, including the IND submission for ARCT-810 - Long-term debt agreement with Western Alliance Bank, amended in October 2019 for a **$15.0 million** term loan[42](index=42&type=chunk) - The term loan bears a floating interest rate (**1.25% to 2.75% above prime**) and matures on **October 30, 2023**[42](index=42&type=chunk) - Monthly interest-only payments are due until **October 1, 2021**, with principal payments starting in 2021[42](index=42&type=chunk) - A **2% fee** is required upon maturity or prepayment due to FDA approval of the LUNAR-OTC (ARCT-810) program[42](index=42&type=chunk) - The company was in compliance with all loan covenants as of March 31, 2020, including the IND application submission for ARCT-810[42](index=42&type=chunk) | Fiscal Year | Principal Payments (in millions) | | :---------- | :------------------------------- | | 2021 | $4.0 | | 2022 | $6.0 | | 2023 | $5.5 | [Note 6. Stockholders' Equity](index=15&type=section&id=Note%206.%20Stockholders'%20Equity) As of March 31, 2020, 622,667 shares of common stock remained unvested and subject to a repurchase option, which was reduced to 311,333 shares after achieving a third milestone in April 2020, with dilutive securities excluded from net loss per share calculations as they were anti-dilutive - As of March 31, 2020, **622,667 shares** of common stock were unvested and subject to a repurchase option[44](index=44&type=chunk) - After meeting the third milestone (IND application allowed by FDA) in April 2020, the unvested balance was reduced to **311,333 shares**[44](index=44&type=chunk) - Dilutive securities (**316,957 in 2020** and **67,051 in 2019**) were excluded from diluted net loss per share calculations because they were anti-dilutive[45](index=45&type=chunk) [Note 7. Share-Based Compensation](index=15&type=section&id=Note%207.%20Share-Based%20Compensation) Total share-based compensation expense increased to $0.8 million for the three months ended March 31, 2020, from $0.4 million in the prior-year period, reflecting increased activity in both research and development and general and administrative functions, with 353,332 shares remaining available under the 2019 Omnibus Equity Incentive Plan | Expense Category | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Research and development | $266 | $152 | | General and administrative | $583 | $247 | | **Total** | **$849** | **$399** | - **353,332 shares** remain available for future issuance under the 2019 Omnibus Equity Incentive Plan[46](index=46&type=chunk) [Note 8. Income Taxes](index=16&type=section&id=Note%208.%20Income%20Taxes) The company recorded no income tax expense for the three months ended March 31, 2020, as losses were offset by a full valuation allowance, and the recently enacted CARES Act is expected to have an immaterial impact on the company's tax position for the quarter - No income tax expense recorded for the three months ended March 31, 2020, due to a full valuation allowance offsetting losses[49](index=49&type=chunk) - The CARES Act, enacted March 27, 2020, is estimated to have an immaterial impact on the company's tax position for the quarter[49](index=49&type=chunk) [Note 9. Commitments and Contingencies](index=16&type=section&id=Note%209.%20Commitments%20and%20Contingencies) The company has commitments related to COVID-19 vaccine development, a Cystic Fibrosis Foundation agreement, and operating leases, with a grant of up to S$14.0 million for COVID-19 vaccine co-development and an amended CFF agreement increasing funding for LUNAR-CF to $15.0 million - COVID-19 Vaccine Development: Awarded a grant of up to **S$14.0 million** (approx. **US$10 million**) from the Singapore Economic Development Board. Recognized **$0.5 million** of contra expense for the three months ended March 31, 2020[50](index=50&type=chunk) - Cystic Fibrosis Foundation Agreement: Amended to increase funding for LUNAR-CF to **$15.0 million**. Recognized **$2.0 million** of contra expense for the three months ended March 31, 2020, with **$1.9 million** remaining in accrued expenses[51](index=51&type=chunk) | Operating Lease Payments (in thousands) | Amount | | :-------------------------------------- | :----- | | 2020 (remaining) | $1,489 | | 2021 | $1,427 | | 2022 | $1,349 | | 2023 | $1,390 | | 2024 | $1,432 | | Thereafter | $314 | | **Total remaining lease payments** | **$7,401** | | Less: imputed interest | $(1,298) | | **Total operating lease liabilities** | **$6,103** | - Weighted-average remaining lease term: **4.7 years**; Weighted-average discount rate: **8.4%**[54](index=54&type=chunk) [Note 10. Related Party Transactions](index=18&type=section&id=Note%2010.%20Related%20Party%20Transactions) Ultragenyx, a collaboration partner, held 15.8% of the company's outstanding common stock as of March 31, 2020, and has an option to purchase additional shares, with the company recognizing $0.9 million in revenue from Ultragenyx and recording a $0.2 million loss from an equity-method investment in a privately held company - Ultragenyx owns **15.8%** of the company's outstanding common stock as of March 31, 2020[56](index=56&type=chunk) - Ultragenyx has a two-year option to purchase up to **600,000 additional shares** at **$16.00 per share**[56](index=56&type=chunk) - Recognized **$0.9 million** in revenue from Ultragenyx for the three months ended March 31, 2020[56](index=56&type=chunk) - Holds a **19% equity-method investment** in a privately held company related to ADAIR technology[57](index=57&type=chunk) - Recorded a loss of **$0.2 million** from the equity-method investment for the three months ended March 31, 2020[57](index=57&type=chunk) [Note 11. Subsequent Events](index=18&type=section&id=Note%2011.%20Subsequent%20Events) Subsequent to the quarter end, in April 2020, the company's Investigational New Drug (IND) application for a Phase 1b study of ARCT-810 was allowed by the FDA, and a Clinical Trial Application for a Phase 1 study was approved in New Zealand, with the company also completing an underwritten public offering raising approximately $75.5 million in net proceeds - In April 2020, the FDA allowed the IND application for a Phase 1b study of ARCT-810 (OTC deficiency)[58](index=58&type=chunk) - A Clinical Trial Application for a Phase 1 study in healthy volunteers was approved by the New Zealand Medicines and Medical Devices Safety Authority[58](index=58&type=chunk) - In April 2020, the company completed an underwritten public offering, receiving approximately **$75.5 million** in net proceeds[17](index=17&type=chunk)[58](index=58&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial performance and condition for the three months ended March 31, 2020, highlighting a decrease in collaboration revenue, an increase in operating expenses, and a net loss, while noting improved liquidity from recent capital raises [Overview](index=19&type=section&id=Overview) Arcturus is a clinical-stage mRNA medicines company focused on infectious disease vaccines and rare diseases, leveraging its STARR technology and LUNAR delivery system, with primary activities in R&D, general and administrative functions, and capital raising, facing significant risks typical of an early-stage biotechnology company - Clinical-stage messenger RNA medicines company focused on infectious disease vaccines and rare diseases[61](index=61&type=chunk) - Utilizes Self-Transcribing and Replicating RNA (STARR) technology and proprietary LUNAR lipid nanoparticle delivery system[61](index=61&type=chunk) - Primary activities: research and development, general and administrative, and capital raising[61](index=61&type=chunk) - Subject to significant risks, including dependence on external funding, key personnel, and proprietary technology protection[61](index=61&type=chunk) [Results of Operations](index=19&type=section&id=Results%20of%20Operations) Collaboration revenue decreased by 39.2% due to reduced reimbursements from a terminated collaboration, while operating expenses increased by 11.5%, driven by higher R&D costs for LUNAR-CF and LUNAR-COVID programs, increased headcount, and facility expenses, and net finance expense increased significantly due to reduced interest income and higher interest expense from increased debt [Collaboration Revenue](index=19&type=section&id=Collaboration%20Revenue) Collaboration revenue decreased by $1.7 million, or 39.2%, for the three months ended March 31, 2020, compared to the same period in 2019, primarily attributed to a $1.6 million decrease in reimbursements from the CureVac OTC collaboration, which ended in the second quarter of 2019 | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change (in thousands) | % Change | | :---------------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Collaboration revenue | $2,646 | $4,350 | $(1,704) | -39.2% | - Primary reason for decrease: **$1.6 million** reduction from CureVac reimbursements due to the OTC collaboration ending in Q2 2019[63](index=63&type=chunk) [Operating Expenses](index=20&type=section&id=Operating%20Expenses) Total operating expenses increased by $1.3 million, or 11.5%, to $12.1 million for the three months ended March 31, 2020, with research and development expenses rising by 8.1% due to increased costs for LUNAR-CF and the new LUNAR-COVID program, as well as higher personnel and facility expenses, and general and administrative expenses increasing by 18.6% due to increased headcount | Operating Expenses (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Research and development, net | $7,917 | $7,324 | $593 | 8.1% | | General and administrative | $4,191 | $3,534 | $657 | 18.6% | | **Total operating expenses** | **$12,108** | **$10,858** | **$1,250** | **11.5%** | | R&D Expense Category (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | LUNAR-OTC (ARCT-810) | $3,692 | $3,729 | $(37) | -1.0% | | LUNAR-CF, net | $336 | $191 | $145 | 75.9% | | LUNAR-COVID, net | $131 | $0 | $131 | 100.0% | | Discovery technologies | $481 | $598 | $(117) | -19.6% | | Partnered discovery technologies | $371 | $305 | $66 | 21.6% | | Personnel related expenses | $2,203 | $2,076 | $127 | 6.1% | | Facilities and equipment expenses | $703 | $425 | $278 | 65.4% | | **Total R&D expenses, net** | **$7,917** | **$7,324** | **$593** | **8.1%** | - LUNAR-CF expenses increased by **$0.1 million (75.9%)** due to increased R&D costs associated with the CFF Agreement amendment, with further increases expected towards IND submission in 2021[69](index=69&type=chunk) - LUNAR-COVID program initiated in Q1 2020, generating **$0.1 million** in expenses, partially offset by Singapore Economic Development Board funds. Expected to enter human clinical trials in Q3 2020[69](index=69&type=chunk) - Personnel-related expenses increased by **$0.1 million** due to increased headcount, partially offset by funds from CFF (**$0.8M**) and Singapore EDB (**$0.2M**)[69](index=69&type=chunk) - Facilities and equipment expenses increased by **$0.3 million** due to higher rent and costs from a second facility lease entered in February 2020[71](index=71&type=chunk) [Finance (expense) income, net](index=21&type=section&id=Finance%20(expense)%20income,%20net) Net finance expense increased by 72.7% to $0.2 million for the three months ended March 31, 2020, compared to $0.1 million in the prior-year period, driven by a decrease in interest income due to reduced investments and an increase in interest expense resulting from a $5.0 million increase in long-term debt | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | Change (in thousands) | % Change | | :----------------- | :----------------------------------------------- | :----------------------------------------------- | :-------------------- | :------- | | Interest income | $102 | $115 | $(13) | -11.3% | | Interest expense | $(254) | $(203) | $(51) | 25.1% | | **Total** | **$(152)** | **$(88)** | **$(64)** | **72.7%** | - Interest income decreased due to reduced investments[73](index=73&type=chunk) - Interest expense increased due to a **$5.0 million** increase in long-term debt[73](index=73&type=chunk) [Off-balance sheet arrangements](index=21&type=section&id=Off-balance%20sheet%20arrangements) As of March 31, 2020, the company had no off-balance sheet arrangements with unconsolidated entities or financial collaborations - No off-balance sheet arrangements with unconsolidated entities or financial collaborations as of March 31, 2020[74](index=74&type=chunk) [Contractual obligations](index=21&type=section&id=Contractual%20obligations) As of March 31, 2020, the company had non-cancelable contractual obligations totaling approximately $7.4 million, primarily related to long-term debt and operating leases - Total non-cancelable contractual obligations were approximately **$7.4 million** as of March 31, 2020[75](index=75&type=chunk) [Liquidity and Capital Resources](index=21&type=section&id=Liquidity%20and%20Capital%20Resources) The company is a clinical-stage bioscience company dependent on external financing, expecting continued losses until a successful drug is developed, with cash, cash equivalents, and restricted cash totaling $59.6 million as of March 31, 2020, and an additional $75.5 million raised from a public offering and $15.0 million borrowed from Western Alliance Bank subsequent to the quarter - Dependent on external equity and debt financings to fund operations, expecting continued losses until a successful drug is developed[76](index=76&type=chunk) - Primary sources of cash: collaboration partners, public/private offerings of common stock, option/warrant exercises, and interest income[76](index=76&type=chunk) - From inception through March 31, 2020, raised approximately **$210.4 million** in gross proceeds[76](index=76&type=chunk) - Cash, cash equivalents, and restricted cash totaled **$59.6 million** as of March 31, 2020[76](index=76&type=chunk) - In April 2020, raised an additional **$75.5 million** from an underwritten public offering and borrowed **$15.0 million** from Western Alliance Bank[76](index=76&type=chunk)[85](index=85&type=chunk) [Cash Flow Summary](index=22&type=section&id=Cash%20Flow%20Summary) Net cash used in operating activities increased to $11.9 million for the three months ended March 31, 2020, from $5.4 million in the prior-year period, driven by a higher net loss and changes in working capital, while investing activities used $0.1 million and financing activities provided $0.1 million from stock option exercises | Cash Flow Category (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating activities | $(11,858) | $(5,411) | | Investing activities | $(142) | $(78) | | Financing activities | $118 | $0 | | **Net decrease in cash** | **$(11,882)** | **$(5,489)** | - Net cash used in operating activities increased due to a higher net loss (**$9.8M** vs **$6.9M**) and negative changes in working capital (**$3.5M outflow** vs **$0.4M inflow**)[80](index=80&type=chunk) - Investing activities primarily involved the acquisition of property and equipment[81](index=81&type=chunk) - Financing activities in 2020 included **$0.1 million** from stock option exercises[82](index=82&type=chunk) [Funding Requirements](index=22&type=section&id=Funding%20Requirements) The company anticipates continued net losses and increasing funding requirements to support product development, regulatory approvals, and commercialization, with future funding dependent on milestone achievements, strategic alliances, clinical trial progress, regulatory outcomes, and operational expansion, and plans to seek additional capital through equity/debt financings or collaborations - Expects continued annual net losses and increasing losses as product candidates advance through development and regulatory approval[83](index=83&type=chunk) - Requires additional capital to fund operations and long-term plans[83](index=83&type=chunk) - Future funding requirements are difficult to forecast and depend on factors like milestone achievements, strategic alliances, clinical trial progress, regulatory approvals, and operational costs[83](index=83&type=chunk)[84](index=84&type=chunk) - Intends to seek additional capital through equity/debt financings or collaborative arrangements[83](index=83&type=chunk) [Critical Accounting Policies and Estimates](index=23&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) The company's critical accounting policies involve significant estimates and judgments, particularly in revenue recognition from collaborative agreements, including identifying distinct performance obligations, determining transaction prices, allocating prices, and estimating amortization of upfront payments and the probability of milestone achievement - Critical accounting policies involve significant estimates and judgments, especially in revenue recognition[86](index=86&type=chunk)[87](index=87&type=chunk) - Key judgments in revenue recognition: identifying distinct performance obligations, determining transaction price (often excluding uncertain future payments), and allocating transaction price[88](index=88&type=chunk)[89](index=89&type=chunk)[90](index=90&type=chunk) - Amortization of upfront payments uses an input method, requiring estimates of total costs or time to complete services[92](index=92&type=chunk) - Milestone payments are recognized when deemed probable, considering factors outside the company's control[89](index=89&type=chunk)[93](index=93&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=24&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risks are interest income and expense sensitivity and foreign currency exchange rates, particularly related to the Singapore Economic Development Board grant, but it believes it is not currently subject to any material market risk exposure and may use derivative financial instruments for hedging if deemed appropriate - Primary market risks: interest income and expense sensitivity, and foreign currency exchange rates[94](index=94&type=chunk) - Foreign exchange risk relates to the grant from the Singapore Economic Development Board[94](index=94&type=chunk) - Believes it is not currently subject to any material market risk exposure[94](index=94&type=chunk) - May use derivative financial instruments for hedging or risk management if appropriate[94](index=94&type=chunk) [Item 4. Controls and Procedures](index=24&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the principal executive and financial officers, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2020, concluding they were effective at a reasonable assurance level, with no material changes to internal control over financial reporting occurring during the quarter - Disclosure controls and procedures were evaluated as effective at the reasonable assurance level as of March 31, 2020[95](index=95&type=chunk) - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2020[96](index=96&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in a lawsuit filed by a former employee alleging sexual assault and seeking $30.0 million in damages, with the plaintiff agreeing to arbitration, and the company intending to vigorously defend itself, believing the allegations are without merit, but cannot estimate a potential loss at this preliminary stage - A former employee filed a lawsuit in December 2019 alleging sexual assault and seeking **$30.0 million** in damages[98](index=98&type=chunk) - The plaintiff has agreed to stipulate to arbitration for the claims against the company[98](index=98&type=chunk) - The company believes the allegations are without merit and intends to vigorously defend itself[98](index=98&type=chunk) - Due to the preliminary stage of litigation, the company is unable to estimate a potential loss or range of losses[98](index=98&type=chunk) [Item 1A. Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) This section updates the risk factors from the annual report, specifically addressing new risks related to the company's pursuit of a COVID-19 vaccine candidate, including the early stage of development, potential for delays or negative impacts on other programs, competition, and the unpredictable nature of the pandemic's effect on business operations and clinical trials - The pursuit of a COVID-19 vaccine candidate is at an early stage, with no assurance of timely or successful development[100](index=100&type=chunk) - Allocation of resources to COVID-19 vaccine development may delay or negatively impact other development programs[100](index=100&type=chunk) - Significant competition exists in COVID-19 vaccine development, potentially diverting funding and demand[100](index=100&type=chunk)[101](index=101&type=chunk) - The COVID-19 pandemic has caused interruptions and delays to the business plan, potentially impacting clinical supply, patient enrollment, and clinical trial timelines[102](index=102&type=chunk)[104](index=104&type=chunk) - Foreign clinical trials (FCTs) for the COVID-19 vaccine, while cheaper, carry risks that could inhibit FDA approval[105](index=105&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report[106](index=106&type=chunk) [Item 3. Defaults Upon Senior Securities](index=26&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report for the period - None to report[106](index=106&type=chunk) [Item 4. Mine Safety Disclosures](index=26&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures are not applicable to the company's operations - Not applicable[106](index=106&type=chunk) [Item 5. Other Information](index=26&type=section&id=Item%205.%20Other%20Information) There was no other information to report for the period - None to report[106](index=106&type=chunk) [Item 6. Exhibits](index=27&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, indemnification agreements, equity incentive plans, loan agreements, collaboration agreements, and certifications - Includes Certificate of Incorporation, Bylaws, and Merger Agreement[108](index=108&type=chunk) - Lists various agreements such as the 2019 Omnibus Equity Incentive Plan, Loan and Security Agreement with Western Alliance Bank, and collaboration agreements with Janssen, Ultragenyx, CureVac, and Takeda[108](index=108&type=chunk)[109](index=109&type=chunk) - Includes Acceptance Letter with the Economic Development Board of Singapore and Sales Agreement with Stifel, Nicolaus & Company[109](index=109&type=chunk) - Contains certifications by the Principal Executive Officer and Principal Financial Officer (Rule 13a-14(a) and 18 U.S.C. Section 1350)[109](index=109&type=chunk) [SIGNATURE](index=30&type=section&id=SIGNATURE) The report is duly signed on behalf of Arcturus Therapeutics Holdings Inc. by Andy Sassine, Chief Financial Officer, on May 8, 2020 - Signed by Andy Sassine, Chief Financial Officer, on May 8, 2020[113](index=113&type=chunk)[114](index=114&type=chunk)