Arcturus Therapeutics(ARCT) - 2023 Q3 - Quarterly Report

FORM 10-Q Filing Information Special Note Regarding Forward-Looking Statements Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets This statement provides a snapshot of the company's financial position as of September 30, 2023 Assets (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Cash and cash equivalents | $311,918 | $391,883 | $(79,965) | | Restricted cash | $35,000 | — | $35,000 | | Accounts receivable | $38,220 | $2,764 | $35,456 | | Total current assets | $393,268 | $403,333 | $(10,065) | | Total assets | $457,650 | $450,387 | $7,263 | Liabilities & Equity (in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | Change | | :-------------------------------- | :----------- | :----------- | :----- | | Accounts payable | $18,362 | $7,449 | $10,913 | | Current portion of long-term debt | — | $60,655 | $(60,655) | | Deferred revenue (current) | $40,768 | $28,648 | $12,120 | | Total current liabilities | $87,683 | $126,984 | $(39,301) | | Long-term debt | $20,000 | — | $20,000 | | Total liabilities | $177,588 | $180,075 | $(2,487) | | Total stockholders' equity | $280,062 | $270,312 | $9,750 | - Key Balance Sheet Changes include a $79.97 million decrease in cash, a $35.46 million increase in accounts receivable, and a $9.75 million increase in total stockholders' equity[11] - Restricted cash increased significantly to $35.0 million (current) and $22.13 million (non-current)[11] - Current portion of long-term debt was eliminated, while new long-term debt of $20.0 million was added[11] Condensed Consolidated Statements of Operations and Comprehensive Loss The company's financial performance shows significant revenue growth and a reduced net loss Revenue (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Collaboration revenue | $43,376 | $13,369 | $132,670 | $45,706 | | Grant revenue | $1,764 | — | $3,274 | — | | Total revenue | $45,140 | $13,369 | $135,944 | $45,706 | Operating Expenses (in thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Research and development, net | $51,077 | $37,688 | $155,513 | $120,770 | | General and administrative | $13,377 | $12,488 | $40,364 | $34,211 | | Total operating expenses | $64,454 | $50,176 | $195,877 | $154,981 | Profitability (in thousands, except per share) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Loss from operations | $(19,314) | $(36,807) | $(59,933) | $(109,275) | | Gain on debt extinguishment | — | — | $33,953 | — | | Finance income (expense), net | $3,981 | $(321) | $9,710 | $(1,445) | | Net loss | $(16,222) | $(35,266) | $(18,018) | $(107,998) | | Net loss per share, basic and diluted | $(0.61) | $(1.33) | $(0.68) | $(4.09) | - Total revenue for Q3 2023 increased by 237.6% to $45.14 million, driven by the CSL Seqirus collaboration and BARDA grant[13][94][95] - Net loss significantly decreased for both the three-month and nine-month periods, aided by a $33.95 million gain on debt extinguishment[13][106] - Research and development expenses increased by 35.5% for the quarter, reflecting higher clinical research and manufacturing costs[13][98][100] - Finance income turned positive, driven by higher interest rates and reduced interest expense[13][105] Condensed Consolidated Statements of Stockholders' Equity This statement outlines changes in stockholders' equity, reflecting net losses and share-based compensation Total Stockholders' Equity (in thousands) | Metric | Dec 31, 2022 | Mar 31, 2023 | Jun 30, 2023 | Sep 30, 2023 | | :--------------------------- | :----------- | :----------- | :----------- | :----------- | | Total Stockholders' Equity | $270,312 | $329,248 | $285,175 | $280,062 | - For the nine months ended Sep 30, 2023, changes in equity were driven by a net loss of $18.02 million and share-based compensation expense of $25.83 million[16][20][63] - Common shares outstanding increased from 26,555 thousand to 26,723 thousand since December 31, 2022[11][16] Condensed Consolidated Statements of Cash Flows This statement details cash flows, indicating improved operating cash flow and an increase in total cash Cash Flow Summary (9 months ended Sep 30, 2023 vs. 2022, in thousands) | Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----- | | Net cash provided by (used in) operating activities | $(17,470) | $(128,266) | $110,796 | | Net cash used in investing activities | $(2,026) | $(3,919) | $1,893 | | Net cash used in financing activities | $(5,430) | $(627) | $(4,803) | | Net decrease in cash, cash equivalents and restricted cash | $(24,926) | $(132,812) | $107,886 | | Cash, cash equivalents and restricted cash at end of period | $369,051 | $239,757 | $129,294 | - Operating cash outflow improved by $110.80 million, primarily due to a lower net loss and a substantial increase in deferred revenue[20] - Deferred revenue increased by $33.96 million, reflecting upfront and milestone payments from collaborations[20] - Financing activities included $20.0 million in proceeds from new debt and $27.36 million in debt obligation payments[20] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations for figures in the financial statements Note 1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies - Arcturus Therapeutics is a global late-stage clinical messenger RNA medicines company focused on infectious disease vaccines and rare diseases[23][70] - The company had an accumulated deficit of $356.2 million but believes it has sufficient working capital to fund operations for at least the next twelve months[26] - The company operates as one operating segment focused on research and development of its nucleic acid-focused technology[28] - Revenue from collaboration agreements is recognized based on a five-step model, with variable consideration constrained until uncertainty is resolved[29] - All R&D costs are expensed as incurred, net of grants[33] Note 2. Revenue Contract Assets and Liabilities (in thousands) | Metric | Dec 31, 2022 | Additions | Deductions | Sep 30, 2023 | | :------------------ | :----------- | :-------- | :--------- | :----------- | | Accounts receivable | $2,764 | $170,244 | $(134,788) | $38,220 | | Deferred revenue | $48,719 | $169,904 | $(135,944) | $82,679 | Revenue by Source (in thousands) | Source | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | CSL Seqirus | $43,433 | — | $129,257 | — | | Vinbiocare | — | $11,237 | — | $26,815 | | Janssen | — | $934 | $660 | $2,593 | | Other collaboration | $(57) | $1,198 | $2,753 | $3,798 | | BARDA | $1,764 | — | $3,274 | — | | Total Revenue | $45,140 | $13,369 | $135,944 | $45,706 | - The CSL Seqirus collaboration includes a $200.0 million upfront payment and eligibility for over $4.3 billion in future milestones[44][45] - The Vinbiocare License & Supply Agreements were terminated in October 2022, with no remaining performance obligations[47] - The BARDA grant is a cost reimbursement contract for up to $63.2 million for pandemic influenza vaccine development[48] Note 3. Fair Value Measurements - The company uses a three-level hierarchy for fair value measurements, with all recurring fair value assets classified as Level 1[49][50] - The carrying values of cash, receivables, payables, and the Singapore Loan approximate their fair values due to short maturities[49] Note 4. Balance Sheet Details Property and Equipment, Net (in thousands) | Asset Category | Sep 30, 2023 | Dec 31, 2022 | | :--------------------------- | :----------- | :----------- | | Research equipment | $15,764 | $10,251 | | Total (gross) | $20,640 | $18,198 | | Less: accumulated depreciation | $(7,925) | $(5,783) | | Property and equipment, net | $12,715 | $12,415 | - Depreciation and amortization expense was $0.8 million for Q3 2023 and $2.1 million for 9M 2023[52] Accrued Liabilities (in thousands) | Liability Category | Sep 30, 2023 | Dec 31, 2022 | | :---------------------------------------- | :----------- | :----------- | | Accrued compensation | $10,200 | $4,038 | | Income tax payable | $482 | $1,295 | | Current portion of operating lease liability | $4,200 | $3,884 | | Clinical accruals | $3,180 | $4,531 | | Contractual liabilities | $3,492 | $7,468 | | Other accrued research and development expenses | $6,999 | $9,016 | | Total Accrued Liabilities | $28,553 | $30,232 | Note 5. Debt - A $50.0 million revolving credit line was established with Wells Fargo in April 2023, with $20.0 million drawn in September and repaid in October[54][109] - The remaining $34.0 million Singapore Loan was forgiven in Q1 2023, resulting in a gain on debt extinguishment[55] - The Western Alliance Bank Agreement was terminated in March 2023 with a payoff of approximately $7.4 million[56] Note 6. Stockholders' Equity - Potentially dilutive securities were excluded from diluted EPS calculation as they were anti-dilutive, including 1.2 million for Q3 2023 and 0.8 million for 9M 2023[58] Note 7. Share-Based Compensation Expense - As of September 30, 2023, 1,523,452 shares remain available under the 2019 Omnibus Equity Incentive Plan[59] - As of September 30, 2023, 100,725 shares remain available under the 2021 Inducement Equity Incentive Plan[59] Share-Based Compensation Expense (in thousands) | Category | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Research and development | $3,863 | $3,996 | $11,112 | $10,811 | | General and administrative | $5,406 | $5,440 | $14,722 | $13,270 | | Total | $9,269 | $9,436 | $25,834 | $24,081 | Note 8. Income Taxes - Income tax expense was $0.9 million for Q3 2023 and $1.6 million for 9M 2023[61] - No tax benefit was provided for U.S. losses due to a full valuation allowance on deferred tax assets[61] Note 9. Commitments and Contingencies - The Cystic Fibrosis Foundation (CFF) agreement was amended, increasing the award for LUNAR-CF to $24.6 million[62][85] - Operating lease liabilities total $31.22 million as of September 30, 2023, with a weighted-average remaining lease term of 8.3 years[64] Note 10. Related Party Transactions - The company discontinued equity method accounting for its investment in GRI Bio, Inc. in April 2023[67] - The company's ownership in the ARCALIS, Inc. joint venture was 45.8% as of September 30, 2023[25] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Arcturus is a late-stage clinical mRNA medicines company focused on vaccines and rare diseases - The company's focus is on infectious disease vaccines and liver/respiratory rare diseases[70] - It leverages proprietary LUNAR® lipid nanoparticle (LNP) delivery and STARR® self-amplifying mRNA technologies[70][71] Business Updates This section provides key updates on the company's ongoing development programs and collaborations Updates on Vaccine Program - The CSL collaboration grants exclusive global rights for self-amplifying mRNA vaccines against COVID-19, influenza, and other respiratory diseases[72] - The LUNAR-FLU program received a $17.5 million milestone payment in Q3 2023, with a Phase 1 study planned for Q4 2023[72][80][82] COVID Collaboration Program Updates - The ARCT-154 Phase 3 trial in Japan demonstrated immunological non-inferiority and superiority over a conventional mRNA vaccine[73] - Phase 1/2 trial data showed one-year durability of immune response following an ARCT-154 booster[75] - A Phase 3 study for a bivalent vaccine (ARCT-2301) was initiated, with preliminary results expected by end of Q1 2024[79] - The European Medicines Agency (EMA) validated the marketing authorization application for ARCT-154[79] Flu Collaboration Program Updates - Received a $17.5 million milestone payment from CSL Seqirus in Q3 2023 for the LUNAR-FLU program[80] - A Phase 1 clinical study with a novel influenza mRNA vaccine candidate is planned for Q4 2023[72][82] Key Updates on Arcturus-Owned mRNA Therapeutic Development Candidates - The LUNAR-OTC Phase 1b study completed enrollment, with a Phase 2 study initiated but facing challenging enrollment rates[83] - The LUNAR-CF Phase 1 study in healthy participants completed dosing, and a Phase 1b study in adults with CF initiated enrollment in October 2023[83](index=83&type=chunk][84] Updates on Collaboration Agreements This section details the latest developments in the company's collaboration agreements - The Cystic Fibrosis Foundation (CFF) Agreement was amended, increasing funding for LUNAR-CF to $24.6 million[85] - The Development and Option Agreement with CureVac expired on July 24, 2023[86] Updates on ARCALIS Joint Venture ARCALIS, the company's manufacturing joint venture, received significant government grants for facility construction - ARCALIS was awarded up to $115 million in two grants in August 2023 for factory construction and equipment[87] - Total funding awarded to ARCALIS by the Japanese government is approximately $165 million to date[88] - The company's ownership in ARCALIS was 36.7% as of November 6, 2023[88] Updates on Research and Platform Activities The company continues exploratory platform development to expand its product pipeline - Ongoing activities include evaluating genome editing and new targeting approaches using its LUNAR® and STARR® platforms[89] Updates on Supply and Manufacturing The company is adapting its global manufacturing footprint to evolving market demands - An Integrated Global Supply Chain Network has been established with partners across the US, EU, and Asia[90] - Manufacturing processes are being adapted to market shifts from multi-dose to single-dose vial formats for COVID vaccines[90] Results of Operations This section analyzes financial performance, detailing changes in revenue and operating expenses Revenue Total Revenue (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended Sep 30 | $45,140 | $13,369 | $31,771 | >100% | | Nine Months Ended Sep 30 | $135,944 | $45,706 | $90,238 | >100% | - The revenue increase is primarily attributable to the CSL Seqirus collaboration and grant revenue from BARDA[94][95] - The increase was partially offset by decreased revenue from terminated collaboration agreements[94][97] Research and Development Expenses, net Total R&D Expenses, Net (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended Sep 30 | $51,077 | $37,688 | $13,389 | 35.5% | | Nine Months Ended Sep 30 | $155,513 | $120,770 | $34,743 | 28.8% | R&D Expenses by Category (9 months ended Sep 30, 2023 vs. 2022, in thousands) | Category | 2023 | 2022 | $ Change | % Change | | :--------------------------- | :----------- | :----------- | :--------- | :--------- | | LUNAR-COVID, net | $71,501 | $60,774 | $10,727 | 17.7% | | Early-stage programs | $11,594 | $7,031 | $4,563 | >100% | | Discovery technologies | $16,266 | $8,287 | $7,979 | >100% | | Personnel related expenses | $40,206 | $31,862 | $8,344 | 26.2% | | Facilities and equipment | $8,426 | $6,345 | $2,081 | 32.8% | - The increase was driven by higher clinical research, manufacturing, and personnel-related costs[100] - R&D costs are expected to increase and remain substantial as the pipeline progresses[100] General and Administrative Expenses Total G&A Expenses (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended Sep 30 | $13,377 | $12,488 | $889 | 7.1% | | Nine Months Ended Sep 30 | $40,364 | $34,211 | $6,153 | 18.0% | - The increase was primarily due to higher personnel, travel, consulting, and rent expenses[103] - G&A expenses are not expected to increase on a yearly basis from the current quarter's trend[103] Finance income (expense), net Total Finance Income (Expense), Net (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended Sep 30 | $3,981 | $(321) | $4,302 | >100% | | Nine Months Ended Sep 30 | $9,710 | $(1,445) | $11,155 | >100% | - Interest income increased significantly due to higher interest rates and a larger cash balance[105] - Interest expense decreased due to the extinguishment and forgiveness of debt in Q1 2023[105] Other income and expense Total Other Income and Expense (in thousands) | Period | 2023 | 2022 | $ Change | % Change | | :-------------------------- | :----------- | :----------- | :--------- | :--------- | | Three Months Ended Sep 30 | $4 | $1,862 | $(1,858) | -99.8% | | Nine Months Ended Sep 30 | $33,778 | $2,722 | $31,056 | >100% | - A $33.95 million gain on debt extinguishment was recorded in Q1 2023 from the forgiveness of the Singapore Loan[106] Off-balance sheet arrangements The company has not engaged in any off-balance sheet arrangements as of September 30, 2023 - As of September 30, 2023, the company had no off-balance sheet arrangements[108] Liquidity and Capital Resources This section discusses the company's financial liquidity, funding sources, and anticipated use of capital - Operations are funded by capital stock sales, debt, collaboration agreements, and government contracts[109] - The company held $311.9 million in unrestricted cash and cash equivalents as of September 30, 2023[109] - Significant cash inflows were received from the CSL Seqirus collaboration, including a $200.0 million upfront payment and $90.0 million in milestones[109] - Future cash will be used to fund the ARCT-810 Phase 2 trial, the LUNAR-CF program, and other operational expenses[112] Funding Requirements The company anticipates continued losses and the necessity of additional future financing - The company expects to continue generating losses and requires additional capital for long-term operations[113] - Management believes current cash is sufficient for at least the next twelve months[113] - The future capital strategy involves seeking additional capital through equity, debt, or partnership arrangements[113] Critical Accounting Policies and Estimates There have been no material changes to the company's critical accounting policies and estimates - There were no material changes to critical accounting policies and estimates from the 2022 Annual Report[115] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest income sensitivity to changes in U.S. interest rates - The company believes it is not subject to any material market risk exposure and does not use derivative financial instruments[116] Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023 - Management concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[117] Changes in Internal Control over Financial Reporting Management reported no material changes to internal control over financial reporting during the period - There were no material changes in internal controls over financial reporting during the quarter[118] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company may be involved in various legal proceedings arising in the ordinary course of business - Outcomes of legal proceedings are inherently uncertain, making assessment of loss difficult[120] Item 1A. Risk Factors This section updates risk factors, highlighting challenges in the evolving COVID-19 vaccine market - The evolving market for COVID-19 vaccines poses challenges, including a fragmented customer base and less predictable orders[121] - These factors could impact the potential market for the company's COVID-19 vaccine and increase R&D costs[121] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities or use of proceeds[122] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - There were no defaults upon senior securities[122] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[122] Item 5. Other Information This section reports on changes in Rule 10b5-1 trading arrangements by company officers Rule 10b5-1 Trading Arrangements - A company officer modified an existing Rule 10b5-1 trading arrangement on August 24, 2023[123] - The arrangement provides for the exercise of up to 36,064 options and subsequent sale of the underlying shares[123] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q - The exhibit list includes corporate governance documents, equity plans, and various collaboration and financing agreements[125][130][131][132][133][134][135][136][137][138][139][140][141][143][144] - Certifications from the Principal Executive Officer and Principal Financial Officer are included[145] - Financial statements are formatted in Inline Extensible Business Reporting Language (Inline XBRL)[146] Signatures