arct-10q_20190930.htm

 

 

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, 2019

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 6, 2019, the registrant had 15,125,293 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

1

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2019 and 2018

2

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018

3

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

4

 

Notes to Condensed Consolidated Financial Statements

5

Item 2.

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

20

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

27

Item 3.

Defaults Upon Senior Securities

27

Item 4.

Mine Safety Disclosures

27

Item 5.

Other Information

27

Item 6.

Exhibits

28

Signatures

31

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In U.S. dollars in thousands, except par value information)

 

 

 

September 30,

2019

 

 

December 31,

2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

74,172

 

 

$

36,709

 

Accounts receivable

 

 

2,625

 

 

 

4,481

 

Prepaid expenses and other current assets

 

 

2,611

 

 

 

638

 

Total current assets

 

 

79,408

 

 

 

41,828

 

Property and equipment, net

 

 

2,073

 

 

 

1,975

 

Operating lease right-of-use asset, net

 

 

5,324

 

 

 

 

Equity-method investment

 

 

303

 

 

 

288

 

Non-current restricted cash

 

 

107

 

 

 

107

 

Total assets

 

$

87,215

 

 

$

44,198

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,013

 

 

$

2,398

 

Accrued liabilities

 

 

6,676

 

 

 

3,907

 

Deferred revenue

 

 

10,999

 

 

 

6,272

 

Total current liabilities

 

 

21,688

 

 

 

12,577

 

Deferred revenue, net of current portion

 

 

14,551

 

 

 

7,534

 

Long-term debt

 

 

10,016

 

 

 

9,911

 

Operating lease liability, net of current portion

 

 

5,065

 

 

 

 

Deferred rent

 

 

 

 

 

534

 

Total liabilities

 

$

51,320

 

 

$

30,556

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock: $0.001 par value; 30,000 shares authorized; 15,126 issued and

   outstanding at September 30, 2019; NIS 0.07 par value; 30,000 shares authorized,

   10,762 issued, 10,719 outstanding and 43 held in treasury at December 31, 2018

 

 

15

 

 

 

214

 

Additional paid-in capital

 

 

96,559

 

 

 

58,302

 

Accumulated deficit

 

 

(60,679

)

 

 

(44,874

)

Total stockholders’ equity

 

 

35,895

 

 

 

13,642

 

Total liabilities and stockholders’ equity

 

$

87,215

 

 

$

44,198

 

 

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)

U.S. dollars in thousands (except per share data)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Collaboration revenue

 

$

3,318

 

 

$

3,423

 

 

$

17,821

 

 

$

8,176

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net

 

 

7,053

 

 

 

3,969

 

 

 

21,646

 

 

 

12,135

 

General and administrative

 

 

3,881

 

 

 

3,810

 

 

 

10,871

 

 

 

17,141

 

Total operating expenses

 

 

10,934

 

 

 

7,779

 

 

 

32,517

 

 

 

29,276

 

Loss from operations

 

 

(7,616

)

 

 

(4,356

)

 

 

(14,696

)

 

 

(21,100

)

Gain (loss) from equity-method investment

 

 

303

 

 

 

(47

)

 

 

15

 

 

 

(47

)

Finance (expense) income, net

 

 

(120

)

 

 

150

 

 

 

(321

)

 

 

373

 

Net loss

 

$

(7,433

)

 

$

(4,253

)

 

$

(15,002

)

 

$

(20,774

)

Net loss per share, basic and diluted

 

$

(0.56

)

 

$

(0.42

)

 

$

(1.18

)

 

$

(2.07

)

Weighted-average shares outstanding, basic and diluted

 

 

13,201

 

 

 

10,093

 

 

 

12,734

 

 

 

10,059

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,433

)

 

$

(4,253

)

 

$

(15,002

)

 

$

(20,774

)

Unrealized gain on short-term investments

 

 

 

 

 

2

 

 

 

 

 

 

7

 

Comprehensive loss

 

$

(7,433

)

 

$

(4,251

)

 

$

(15,002

)

 

$

(20,767

)

 

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)

U.S. dollars in thousands

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss) Gain

 

 

Deficit

 

 

Equity

 

BALANCE - June 30, 2019

 

 

13,120

 

 

$

13

 

 

$

74,851

 

 

$

 

 

$

(53,246

)

 

$

21,618

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,433

)

 

 

(7,433

)

Share-based compensation

 

 

 

 

 

 

 

 

383

 

 

 

 

 

 

 

 

 

383

 

Issuance of common stock, net of issuance costs

 

 

1,995

 

 

 

2

 

 

 

21,276

 

 

 

 

 

 

 

 

 

21,278

 

Issuance of common stock upon exercise of stock options

 

 

11

 

 

 

 

 

 

49

 

 

 

 

 

 

 

 

 

49

 

BALANCE – September 30, 2019

 

 

15,126

 

 

$

15

 

 

$

96,559

 

 

$

 

 

$

(60,679

)

 

$

35,895

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss) Gain

 

 

Deficit

 

 

Equity

 

BALANCE - June 30, 2018

 

 

10,748

 

 

$

214

 

 

$

57,189

 

 

$

2

 

 

$

(39,610

)

 

$

17,795

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,253

)

 

 

(4,253

)

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Share-based compensation

 

 

 

 

 

 

 

 

587

 

 

 

 

 

 

 

 

 

587

 

Issuance of common stock upon exercise of stock options

 

 

13

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

20

 

BALANCE – September 30, 2018

 

 

10,761

 

 

$

214

 

 

$

57,796

 

 

$

4

 

 

$

(43,863

)

 

$

14,151

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss) Gain

 

 

Deficit

 

 

Equity

 

BALANCE - December 31, 2018

 

 

10,762

 

 

$

214

 

 

$

58,302

 

 

$

 

 

$

(44,874

)

 

$

13,642

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,002

)

 

 

(15,002

)

Treasury stock

 

 

(43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

1,185

 

 

 

 

 

 

 

 

 

1,185

 

Redomiciliation share exchange

 

 

 

 

 

(203

)

 

 

203

 

 

 

 

 

 

 

 

 

 

Issuance of restricted common stock and option, net of issuance costs

 

 

2,400

 

 

 

2

 

 

 

15,543

 

 

 

 

 

 

 

 

 

15,545

 

Issuance of common stock, net of issuance costs

 

 

1,995

 

 

 

2

 

 

 

21,276

 

 

 

 

 

 

 

 

 

21,278

 

Issuance of common stock upon exercise of stock options

 

 

12

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

50

 

Effect of adoption of ASU 2014-09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(803

)

 

 

(803

)

BALANCE – September 30, 2019

 

 

15,126

 

 

$

15

 

 

$

96,559

 

 

$

 

 

$

(60,679

)

 

$

35,895

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

(Loss) Gain

 

 

Deficit

 

 

Equity

 

BALANCE – December 31, 2017

 

 

10,699

 

 

$

212

 

 

$

56,674

 

 

$

(3

)

 

$

(23,089

)

 

$

33,794

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,774

)

 

 

(20,774

)

Unrealized gain on short-term investments

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

7

 

Share-based compensation

 

 

 

 

 

 

 

 

753

 

 

 

 

 

 

 

 

 

753

 

Issuance of common stock upon exercise of stock options

 

 

62

 

 

 

2

 

 

 

369

 

 

 

 

 

 

 

 

 

371

 

BALANCE – September 30, 2018

 

 

10,761

 

 

$

214

 

 

$

57,796

 

 

$

4

 

 

$

(43,863

)

 

$

14,151

 

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 CASH FLOWS

(unaudited)

U.S. dollars in thousands

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(15,002

)

 

$

(20,774

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

531

 

 

 

415

 

Amortization of right-of-use operating lease asset

 

 

544

 

 

 

 

Share-based compensation expense

 

 

1,185

 

 

 

753

 

Non-cash interest expense

 

 

105

 

 

 

 

(Gain) loss from equity-method investment

 

 

(15

)

 

 

47

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,856

 

 

 

(643

)

Prepaid expense and other assets

 

 

(1,973

)

 

 

611

 

Accounts payable

 

 

1,489

 

 

 

938

 

Accrued liabilities

 

 

1,432

 

 

 

9

 

Deferred revenue

 

 

10,941

 

 

 

3,647

 

Net cash provided by (used in) operating activities

 

 

1,093

 

 

 

(14,997

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from maturities of short-term investments

 

 

 

 

 

30,211

 

Purchases of short-term investments

 

 

 

 

 

(9,093

)

Acquisition of property and equipment

 

 

(503

)

 

 

(1,253

)

Net cash (used in) provided by investing activities

 

 

(503

)

 

 

19,865

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from the issuance of restricted common stock and option, net of issuance costs

 

 

15,545

 

 

 

 

Proceeds from the issuance of common stock, net of issuance costs

 

 

21,278

 

 

 

 

Proceeds from exercise of stock options

 

 

50

 

 

 

332

 

Net cash provided by financing activities

 

 

36,873

 

 

 

332

 

NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

37,463

 

 

 

5,200

 

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

 

 

36,816

 

 

 

25,238

 

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

 

$

74,279

 

 

$

30,438

 

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

508

 

 

$

 

Non-cash investing activities

 

 

 

 

 

 

 

 

Right-of-use asset obtained in exchange for lease liabilities

 

$

5,868

 

 

$

 

Sale of intangible assets for equity investment

 

$

 

 

$

590

 

Release of repurchase liability for restricted shares

 

$

 

 

$

37

 

Purchase of property and equipment in accounts payable

 

$

126

 

 

$

177

 

 

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

 

 

 

4


 

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”) is a RNA medicines company focused on significant opportunities in rare, liver, and respiratory diseases. Management believes that the Company’s key proprietary technology has the potential to address the major hurdles in RNA development, namely the effective and safe delivery of RNA therapeutics to disease-relevant target tissues.

The financial statements for periods prior to June 17, 2019, the effective date of the Redomiciliation (as described below), relate to Arcturus Therapeutics Ltd. and relate to Arcturus Therapeutics Holdings Inc. for the period from and after June 17, 2019. Unless stated otherwise or the context otherwise requires, references to the “Company,” “Arcturus,” “we,” “our” and “us” mean Arcturus Therapeutics Holdings Inc. and its consolidated subsidiaries from and after the effective time of the Redomiciliation and, prior to that time, to its predecessor, Arcturus Therapeutics Ltd.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Arcturus Therapeutics Holdings Inc. 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 financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  

These condensed consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions regarding the valuation of certain debt and equity instruments, the equity-method investment, share-based compensation, accruals for liabilities, deferred revenue, expense accruals, 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.

Liquidity

The Company’s activities since inception have consisted principally of performing research and development activities, general and administration 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.

The Company is a pre-clinical bioscience company that is dependent on obtaining external equity and debt financings to fund its operations. Historically, the Company’s primary sources of financing have been through the sale of its securities, through issuance of debt and through collaboration agreements. The Company raised $10.0 million in gross proceeds from a long-term debt agreement entered into on October 12, 2018 with Western Alliance Bank (Note 5).  On June 18, 2019, the Company entered into a Third Amendment to the Research Collaboration and License Agreement with Ultragenyx Pharmaceutical Inc. (“Ultragenyx”), from which the Company received $30.0 million. Furthermore, in separate offerings, the Company raised total net proceeds of $21.4 million during the third quarter of 2019 through the sale of equity securities.  Research and development activities have required significant capital investment since the Company’s inception.

The Company expects its operations to continue to require cash investment to pursue the Company’s research and development activities, including preclinical studies, formulation development, clinical trials and related drug manufacturing. The Company has experienced net losses since its inception and as of September 30, 2019 has an accumulated deficit of $60.7 million.  The Company expects to continue to incur additional losses for the foreseeable future, and the Company will need to raise additional debt or equity financing or enter into additional collaborations to fund its development. The ability of the Company to transition to profitability is dependent on identifying and developing successful mRNA drug candidates. In the near future, if the Company is not able to achieve planned milestones, incurs costs in excess of its forecasts, or does not meet the covenant requirements associated with its debt (Note

5


 

5), it will need to reduce discretionary spending, or discontinue the development of some or all of its products, which will delay part of its development programs, all of which will have a material adverse effect on the Company’s ability to achieve its intended business objectives.  There can be no assurances that additional financing will be secured or, if secured, will be on favorable terms to the Company. The Company’s management is of the opinion that its current financial resources will be sufficient to continue the development of the Company’s products for at least twelve months from the date that the condensed consolidated financial statements for the quarter ended September 30, 2019 are issued.

Recent Developments

Arcturus Therapeutics Ltd. (“Arcturus Israel”) completed the process to redomicile from an Israeli limited company to a Delaware corporation (the “Redomiciliation”). On February 11, 2019, Arcturus Israel filed an application with the Tel-Aviv District Court (the “Israeli Court”) to approve the convening of a general shareholders meeting of Arcturus Israel for the approval of the Redomiciliation pursuant to Sections 350 and 351 of the Israeli Companies Law (the “Companies Law”). Following the Israeli Court approval dated March 13, 2019, the Company filed with the Securities and Exchange Commission a registration statement on Form S-4 (the “Form S-4”), which included a joint proxy statement/prospectus for the convening of the general shareholder meeting, held on May 17, 2019, as described in the Form S-4. The general shareholders meeting resulted in the approval of the Redomiciliation, and Arcturus Israel then approached the Israeli Court and requested its approval of the Redomiciliation.

In connection with the Redomiciliation, Arcturus Israel entered into a share exchange agreement (the “Exchange Agreement”) with a special-purpose company, Arcturus Therapeutics Holdings Inc., the reporting company and parent to Arcturus Therapeutics, Inc. (“Arcturus Sub”).

In furtherance of the Redomiciliation, and pursuant to the terms of the Exchange Agreement, the holders of ordinary shares of Arcturus Israel as of a future record date and the holders of options to purchase ordinary shares of Arcturus Israel as of the same record date transferred their ordinary shares of Arcturus Israel and options to purchase ordinary shares of Arcturus Israel, respectively, to the Company and, in exchange thereof, received one share of common stock of the Company for each ordinary share of Arcturus Israel and an option to purchase one share of common stock of the Company in exchange for each ordinary share of Arcturus Israel underlying the existing option to be so exchanged, respectively.

As a result of the Exchange Agreement, the par value of Arcturus Israel’s ordinary shares prior to the Redomiciliation is presented in New Israeli Shekel and the par value of the Company’s common stock subsequent to the Redomiciliation is presented in United States Dollars.  

As of June 17, 2019, the common stock of the Company is listed on the NASDAQ Stock Market LLC (“NASDAQ”). Upon consummation of the transactions contemplated by the Share Exchange Agreement, Arcturus Israel’s ordinary shares were delisted from trading on NASDAQ, and Arcturus Israel became a private company (as defined in the Companies Law) wholly-owned by the Company.

Pursuant to the Exchange Agreement, on June 12, 2019 all of the shares of Arcturus Sub were distributed to the Company and Arcturus Sub became a wholly-owned and direct subsidiary of the Company. This distribution was completed in connection with a liquidation of Arcturus Israel which was formally initiated after the redomiciliation described above.

On October 30, 2019, the Company amended its loan agreement with Western Alliance Bank. See “Note 5. Long-term debt with Western Alliance Bank” for further information.

See “Note 6 Stockholders’ Equity – Registered Direct Offerings” for further information on the Company’s recent registered direct offerings.

Segment Information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. 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

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), or Topic 606, using the modified retrospective transition method. Topic 606 provides a unified model to determine how revenue is recognized and the Company applied the standard to collaborative research and technology agreements that were in progress as of the effective date, January 1, 2019. 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

6


 

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 collaborative research and development agreements include license fees, upfront payments, milestone payments when and if certain research or technology transfer milestones are achieved, development milestones and reimbursement for research and development activities, option exercise fees, other contingent payments for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as 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 Company records research funding as accounts receivable when the right to consideration is unconditional. 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. Under Topic 606, the Company elected to use the practical expedients permitted related to adoption, which does not require the Company to disclose certain information regarding certain remaining performance obligations as of the end of the reporting period. Topic 606 is applicable for revenue recognized in accordance with the practical expedient for measuring progress toward satisfaction of a performance obligation, and variable consideration classified as a sales-based or usage-based royalty promised in exchange for a license.

See “Note 2, Collaboration Revenue” for specific details surrounding the Company’s collaboration arrangements.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet as lease liabilities with corresponding right-of-use assets and to disclose key information about leasing arrangements. The Company adopted Topic 842 on its effective date in the first quarter of 2019 using a modified retrospective approach. The Company elected the available package of practical expedients upon adoption, which allowed it to carry forward historical assessments of whether existing agreements contained a lease and the classification of existing operating leases. The Company continues to report its financial position as of December 31, 2018 under the former lease accounting standard (Topic 840) in the condensed consolidated balance sheet.

The adoption impact was due to the recognition of an operating lease liability with a corresponding right-of-use asset based on the present value of remaining minimum lease payments. A reduction of the right-of-use asset was recorded to reflect the balance of the deferred rent obligation and there was no impact to retained earnings.

7


 

Research and Development, Net

Research and development costs are expensed as incurred. These expenses result from the Company’s independent research and development efforts as well as efforts associated with collaboration arrangements. Research and development costs include salaries and personnel-related costs, consulting fees, fees paid for contract research and manufacturing services, the costs of laboratory supplies, equipment and facilities, preclinical studies and other external costs are shown net of any grants.

Cystic Fibrosis Foundation

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 will increase 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 will be 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, 2019, the Company recognized $0.7 million of contra expense with $3.3 million remaining in accrued expenses.

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, 2019

 

 

September 30, 2018

 

Cash and cash equivalents

 

$

74,172

 

 

$

30,331

 

Non-current restricted cash

 

 

107

 

 

 

107

 

Total cash, cash equivalents and restricted

   cash shown in the statement of cash flows

 

$

74,279

 

 

$

30,438

 

 

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. Dilutive shares of common stock are comprised of stock options.

No dividends were declared or paid during the reported periods.

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Topic 606, which supersedes nearly all existing revenue recognition guidance under GAAP. The FASB subsequently issued amendments to Topic 606 that have the same effective date and transition date.

The Company adopted this new guidance, effective January 1, 2019, using the modified retrospective transition method, in which the standard is applied as of the date of initial adoption. The Company recorded the cumulative effect of initially applying the standard as an adjustment to the opening balance of accumulated deficit. The adoption of the new revenue recognition guidance resulted in an increase of $0.8 million to deferred revenue and an increase of $0.8 million to accumulated deficit as of January 1, 2019. The change in revenue was due to a change in how the Company accounts for changes in the measure of progress and changes to the transaction price and for the recognition of revenue. Under Topic 605, the Company accounted for changes to the measure of progress and changes to the transaction price prospectively. Topic 606 requires companies to account for a change to the measure of progress or a change to the transaction price as a cumulative catch-up in the period of change. There were no other impacts upon the adoption of Topic 606. The Company will apply the standard to all new contracts initiated on or after the effective date.

8


 

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires a lessee to recognize a liability for lease payments (the lease liability) and a right-of-use asset (representing its right to use the underlying asset for the lease term) on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods) using a modified retrospective approach.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the new guidance as of the adoption date, rather than as of the earliest period presented. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the effective date, unless the lease was modified, to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP.

The Company adopted ASU 2016-02, using the optional transition method and electing the package of practical expedients described above on January 1, 2019. Due to the adoption, the Company recognized a new lease liability on the Company’s consolidated balance sheet for its operating lease of office and lab space of $6.4 million on January 1, 2019, with a corresponding right-of-use asset of $5.9 million based on the present value of the remaining minimum lease payments. See Note 8 for further discussion.

Note 2. Collaboration Revenue

The Company has entered into license agreements and collaborative research and development arrangements with pharmaceutical and biotechnology companies. Under these arrangements, the Company is entitled to receive license fees, upfront payments, milestone payments when and if certain research or technology transfer milestones are achieved, development milestones, reimbursement for research and development activities, option exercise fees, other contingent payments for the achievement of defined collaboration objectives and certain preclinical, clinical, regulatory and sales-based events, as well as royalties on sales of commercialized products. The Company’s costs of performing these services are included within research and development expense. 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 model(s), lead candidate identification, and completion of IND-enabling studies. Clinical milestones may include successful enrollment of the first or second patient in or completion of Phase I, II, and III clinical trials, and commercial revenue is 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.

The following table presents changes during the nine months ended September 30, 2019 in the balances of contract assets, including receivables from collaborative 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, 2018

 

$

4,480

 

Additions for revenue billings

 

 

16,524

 

Deductions for cash collections

 

 

(18,379

)

BALANCE – September 30, 2019

 

$

2,625

 

 

 

 

 

 

(in thousands)

 

Contract Liabilities

 

BALANCE - December 31, 2018

 

$

13,806

 

Additions for advanced billings

 

 

29,136

 

Additions resulting from adoption of Topic 606

 

 

803

 

Deductions for promised goods/services provided in current period

 

 

(18,195

)

BALANCE – September 30, 2019

 

$

25,550

 

 

9


 

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

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Collaboration Partner - Janssen

 

$

966

 

 

$

291

 

 

$

2,101

 

 

$

638

 

Collaboration Partner - Ultragenyx

 

 

922

 

 

 

1,789

 

 

 

4,854

 

 

 

4,495

 

Collaboration Partner - Takeda

 

 

224

 

 

 

302

 

 

 

518

 

 

 

905

 

Collaboration Partner - CureVac

 

 

1,057

 

 

 

314

 

 

 

6,360

 

 

 

772

 

Other

 

 

149

 

 

 

727

 

 

 

3,988

 

 

 

1,366

 

Total collaboration revenue

 

$

3,318

 

 

$

3,423

 

 

$

17,821

 

 

$

8,176

 

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

Collaboration Partner – Janssen

In October 2017 the Company entered into a research collaboration and license agreement with Janssen (the “2017 Agreement”). The 2017 Agreement allocated discovery, development, funding obligations, and ownership of related intellectual property among the Company and Janssen. The Company received an upfront payment of $7.7 million and may receive preclinical, development and sales milestone payments of $56.5 million, as well as royalty payments on any future licensed product sales. Janssen began reimbursing the Company for research costs during the first quarter of 2019 upon the completion of the first of three research periods. Janssen may also pay option exercise fees within the $1.0 million to $5.0 million range per target.  Janssen will pay royalties on annual net sales of licensed products in the low to mid-single digits range, subject to reduction on a country-by-country and licensed-product-by-licensed-product basis and subject to certain events, such as expiration of program patents. In addition, the 2017 Agreement includes an exclusivity period.

Accounting Analysis under ASC 606

In evaluating the 2017 Agreement in accordance with ASC Topic 606, the Company concluded that the contract counterparty, Janssen, is a customer. The Company identified the following promised goods/services as of the inception of the Agreement: (i) research services, (ii) license to use Arcturus technology and (iii) participation in the Joint Research Committee. The Company concluded that the promised goods/services are incapable of being distinct and consequently do not have any value on a standalone basis. Accordingly, they are determined to represent a single performance obligation. The Company concluded that Janssen’s options to select additional collaboration targets and to license rights to selected targets are not priced at a discount and therefore do not represent performance obligations for which the transaction price would be allocated.

As of September 30, 2019, the remaining transaction price of $23.6 million, consisting of upfront consideration received and budgeted reimbursable out-of-pocket costs, is expected to be recognized using an input method over the remaining research period of 18 months. None of the development and commercialization milestones were included in the transaction price, as all milestone amounts were not estimated to be met, 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. For the three and nine months ended September 30, 2019, an adjustment of $0.3 million was made to the transaction price.

Total deferred revenue as of September 30, 2019 and December 31, 2018 for Janssen was $6.1 million and $6.5 million, respectively. No transition adjustment was necessary upon adoption of Topic 606. 

Collaboration Partner – Ultragenyx

In October 2015 the Company entered into a research collaboration and license agreement with Ultragenyx (the “Ultragenyx Agreement”), whereby Arcturus granted to Ultragenyx a co-exclusive license under Arcturus technology and shall be 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 Ultragenyx Agreement also includes an initial exclusivity period with an option to extend this period.   

10


 

As part of the Ultragenyx Agreement and related amendments, Ultragenyx has paid $27.9 million in upfront fees, exclusivity extension fees and additional consideration. Ultragenyx also reimburses the Company for all internal and external development costs incurred, pursuant to the Ultragenyx Agreement, is required to make additional payments upon exercise of the Ultragenyx expansion option or exclusivity extension (if any) and if Ultragenyx achieves certain, clinical, regulatory and sales milestones, then the Company is eligible to receive royalty payments. For each development target for which Ultragenyx exercises its option, Ultragenyx will pay the Company a one-time option exercise fee that increases based upon the number of development targets selected by Ultragenyx from $0.5 million to $1.5 million.

The current potential development, regulatory and commercial milestone payments for the existing development targets as of September 30, 2019 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, 2019, the Company has not yet reached the clinical phase of the contract.

On June 18, 2019, Arcturus and Ultragenyx amended the collaboration agreement for a third time (“Amendment 3”). As part of Amendment 3, the total number of targets was increased from 10 to 12, and reserve targets will be exclusively reserved for Ultragenyx with no fees for four years after execution of the amendment. An equity component was also added as part of Amendment 3 wherein Ultragenyx purchased 2.4 million shares of common stock at a premium price. Along with the equity purchase, Ultragenyx received the option to purchase 0.6 million additional shares of common stock at $16 per share within two years of executing the amendment (Note 6).

The consideration received from Ultragenyx as a result of Amendment 3 was equal to $30.0 million and was comprised of a $24.0 million common stock purchase and a $6.0 million upfront payment. Specifically for Amendment 3, management determined the transaction price to be $14.4 million, comprised of $6.0 million from the upfront payment and $8.4 million from the premium paid by Ultragenyx for the purchase of Arcturus common stock. See further discussion below regarding determining the transaction price. Management determined the fair value of the premium received by using the opening stock price subsequent to execution of Amendment 3 and applying a lack of marketability discount as the shares received by Ultragenyx are restricted for two years.  

Accounting Analysis under ASC 606

In evaluating the Ultragenyx agreement in accordance with ASC Topic 606, the Company concluded that the contract counterparty, Ultragenyx, is a customer. The Company has identified the following promised goods/services as part of the initial agreement and subsequent amendments: (i) research services, (ii) license to use Arcturus technology, (iii) exclusivity and (iv) participation in the Joint Steering Committee. The Company concluded that the promised goods/services are incapable of being distinct and consequently do not have any value on a standalone basis. Accordingly, they are determined to represent a single performance obligation. The Company concluded that Ultragenyx’s options to extend exclusivity and options to select additional collaboration targets and to license rights to selected targets are not priced at a discount and therefore do not represent performance obligations for which the transaction price would be allocated.

At September 30, 2019, the transaction price included the upfront consideration received, exclusivity extension payments and additional consideration received pursuant to 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 Food and Drug Administration 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.

Amendment 3 was deemed a contract modification and accounted for as part of the original Ultragenyx Agreement and the Company recorded a cumulative catch-up adjustment of $1.1 million on the modification date. The transaction price will be 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 as of September 30, 2019 and December 31, 2018 from Ultragenyx was $13.6 million and $2.7 million, respectively.

Upon adoption of Topic 606, the Company reversed $0.8 million of previously recorded revenue related to Ultragenyx through an increase to deferred revenue and a decrease to beginning retained earnings. The adjustment was due to a change in the way the Company accounts for updates to the period over which revenue is recognized as well as accounting for adjustments to the transaction price. Under Topic 605, the Company accounted for these changes prospectively and under Topic 606 the Company accounts for the changes as a change in estimate recorded as a cumulative catch-up in the period in which the change occurred.

11


 

Collaboration Partner – CureVac

In January 2018, the Company entered into a Development and Option Agreement with CureVac, (the “Development and Option Agreement”). 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 delivery technology (the LUNAR® platform) (the “Arcturus Delivery Technology”), and CureVac patents and know-how related to mRNA technology. Subject to certain restrictions, the parties will have an undivided one-half interest in the patents and know-how developed jointly by the parties during the course of the Development and Option Agreement.  Pursuant to the terms of the Development and Option Agreement, CureVac will have a number of target options to co-develop from a reserved target list to enter into licenses under the Arcturus Delivery Technology with respect to the development, manufacture and commercialization of licensed products (which can include products identified for development by the Company unless the Company is permitted by the terms of the Development and Option Agreement to place such products on a restricted list). A separate notice and fee will be required for each license agreement. If the target to which the license agreement relates is chosen by the parties for co-development under the Co-Development Agreement (which is defined below and discussed in the following paragraph) the license agreement will terminate as such programs will be covered under the Co-Development Agreement discussed below, and therefore CureVac will be given a credit for any exercise fees, milestone payments already paid and all other payments made in relation to the license agreement towards future such payments incurred with respect to future licenses under the Arcturus Delivery Technology.

Prior to expiration of the initial term of 8 years (which was subsequently amended, as discussed below), the Agreement also includes an option to extend the term on an annual basis for up to 3 years and subject to payment by CureVac to Arcturus of a non-refundable annual extension fee. The agreement included potential milestone payments for selected targets from CureVac to the Company. The current potential milestone payment for the remaining target as of September 30, 2019 is $14.0 million for rare disease targets and $23.0 million for non-rare disease targets. CureVac will pay royalties as a percentage of net sales on a product-by-product and country-by-country basis during the applicable royalty term in the low single-digit range. As of September 30, 2019, the Company has not yet reached the clinical phase of the contract. Pursuant to a May 2018 amendment to the Development and Option Agreement (as amended and restated on September 28, 2018), the Company increased the number of targets available to CureVac under the Development and Option Agreement and agreed upon the license forms to be executed upon selection of the targets by CureVac.

Concurrently with the Development and Option Agreement, the Company entered into a Co-Development and Co-Commercialization Agreement (the “Co-Development Agreement”) which the Company considered a combined contract with the Development and Option Agreement for purposes of revenue recognition. However, on February 11, 2019, the Company announced the termination of the obligations of CureVac for the preclinical development of ARCT-810, effective 180 days from February 5, 2019 and the re-assumption by the Company of the worldwide rights thereto. As a result, Arcturus will reassume 100% global rights for its flagship asset, clinical development candidate ARCT-810, a messenger RNA (mRNA) drug to treat ornithine transcarbamylase deficiency.

On July 26, 2019, the Company entered into an amendment (“CureVac Amendment”) to its Development and Option Agreement (as amended, the “Development and Option Agreement”), with CureVac, pursuant to which the Company and CureVac agreed to (i) shorten the time period during which CureVac may select potential targets to be licensed from the Company from eight years to four years, and (ii) reduce the overall number of maximum targets to be reserved and licensed.

In connection with the CureVac Amendment, the Company and CureVac also entered into a Termination Agreement (the “Termination Agreement”) terminating the Co-Development Agreement between the Company and CureVac dated as of January 1, 2018. The Termination Agreement is effective as of July 26, 2019. Pursuant to the Termination Agreement, CureVac agreed to make a one-time payment to Arcturus in the amount of $4.0 million. The payment was made in July 2019.

Accounting Analysis under ASC 606

In evaluating the CureVac Development and Option Agreement and Co-Development Agreement in accordance with ASC Topic 606, the Company concluded that the contract counterparty, CureVac, is a customer. The Company has identified the following promised goods/services as part of the initial agreement with CureVac and subsequent amendments: (i) research services, (ii) license to use Arcturus technology, (iii) exclusivity and (iv) participation in the Joint Steering Committee. The Company concluded that the promised goods/services are incapable of being distinct and consequently do not have any value on a standalone basis. Accordingly, they are determined to represent a single performance obligation. The Company concluded that CureVac’s options to extend the research term and options to select additional collaboration targets and to license rights to selected targets are not priced at a discount and therefore do not represent performance obligations for which the transaction price would be allocated.

At September 30, 2019, the transaction price included the $5.0 million 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

12


 

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. For the three and nine months ended September 30, 2019, no adjustments were made to the transaction price.

The transaction price of $5.0 million was recorded as deferred revenue in the Company’s balance sheet upon receipt and is currently being recognized as revenue on a straight-line basis using an input method over the amended forty-six month contractual term as of September 30, 2019. As a result of Amendment 3, the Company recorded a cumulative catch up adjustment of $0.4 million on the modification date, July 26, 2019. Total deferred revenue as of September 30, 2019 and December 31, 2018 for CureVac was $3.4 million and $4.4 million, respectively. No adjustment was necessary upon adoption of Topic 606.

Other Collaboration Revenue

The $4.0 million of other collaboration revenue for the nine months ended September 30, 2019 was primarily related to the Research and Exclusive License Agreement with Synthetic Genomics, Inc. (“SGI”) into which the Company entered during October 2017. Under the agreement, the Company granted SGI an exclusive license for the Arcturus LMD Technology to research, develop and sell products for diseases excluding all respiratory disease viruses other than influenza. Revenue related to this agreement is made up of labor reimbursements and sublicense revenue. The Company recognized a sublicense revenue amount of $3.3 million for the nine months ended September 30, 2019 whereby SGI sublicensed to multiple parties.  

Note 3. 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 establishes 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, and accrued liabilities 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, 2019 and December 31, 2018, all assets measured at fair value on a recurring basis consisted of cash equivalents, 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 4. Balance Sheet Details

Prepaid expenses and other current assets consisted of the following as of September 30, 2019 and December 31, 2018:

 

(in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Prepaid expenses

 

$

2,578

 

 

$

546

 

Other current assets

 

 

33

 

 

 

92

 

Total

 

$

2,611

 

 

$

638

 

 

13


 

Property and equipment, net for the same periods consisted of the following:

 

(in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Research equipment

 

$

3,235

 

 

$

2,711

 

Computers and software

 

 

271

 

 

 

200

 

Office equipment and furniture

 

 

561

 

 

 

527

 

Leasehold improvements

 

 

34

 

 

 

34

 

Total

 

 

4,101

 

 

 

3,472

 

Less accumulated depreciation and amortization

 

 

(2,028

)

 

 

(1,497

)

Property and equipment, net

 

$

2,073

 

 

$

1,975

 

 

Depreciation and amortization expense was $0.2 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $0.4 million for nine months ended September 30, 2019 and 2018, respectively.

Accrued liabilities consisted of the following as of September 30, 2019 and December 31, 2018:

 

(in thousands)

 

September 30, 2019

 

 

December 31, 2018

 

Accrued compensation

 

$

1,979

 

 

$

974

 

Cystic Fibrosis Foundation Liability (Note 1)

 

 

3,336

 

 

 

 

Refundable fees received

 

 

 

 

 

2,259

 

Current portion of operating lease liability

 

 

801

 

 

 

 

Other accrued liabilities

 

 

560

 

 

 

674

 

Total

 

$

6,676

 

 

$

3,907

 

 

Note 5. Debt

Long-term debt with Western Alliance Bank

On October 12, 2018, the Company entered into a Loan and Security Agreement with Western Alliance Bank (the “Bank”) whereby the Company received gross proceeds of $10.0 million under a long-term debt agreement (the “Loan”). The Loan has a maturity date of October 1, 2022 and carries interest at the U.S. prime rate plus 1.25%. The loan has an interest-only period of 19 months, which could be extended by an additional 6 months if certain conditions are met, followed by an amortization period of 30 months, or 24 months if the interest-only period is extended. 

The Company paid a loan origination fee of $128,000 which was recorded as a debt discount and is being accreted over the term of the Loan. In addition, the Company is required to pay a fee of $350,000 upon certain change of control events.

Upon maturity or prepayment, the Company will be required to pay a 3% fee, or a 2% fee if the U.S. Food and Drug Administration accepts certain IND applications prior to maturity. Because acceptance of an IND is outside of the Company’s control, management estimated that the Company will be liable for a fee of 3% of the principal balance, or $300,000 upon repayment or maturity, and such fee is accreted to the debt balance using the effective interest method over the term of the Loan.

The Loan is collateralized by all of the assets of the Company, 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 the Company’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of the Company’s capital stock. In addition, the Company is required to maintain at least 50% of its deposit and investment accounts, or $20 million, whichever is lower, with Western Alliance Bank.

The Loan also includes covenants which include the Company’s (1) nomination of a clinical candidate by December 31, 2018, which the Company is in compliance with, and (2) submission of a clinical candidate for IND application, made to the U.S. Food and Drug Administration by December 31, 2019 and have it approved by January 31, 2020, provided that, if the Company has received net cash proceeds from sale, on or after October 12, 2018, of the Company’s equity securities in an amount of not less than $15,000,000, then the IND submission date shall be extended to May 31, 2020 and the approval date shall be extended to June 30, 2020. As a result of the equity purchase by Ultragenyx of 2.4 million shares of common stock (previously discussed at Note 2), the IND submission date and approval date have been extended to May 31, 2020 and June 30, 2020, respectively.

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. As of September 30, 2019, the Company is in compliance with all covenants and conditions of the Loan.

14


 

On October 30, 2019, Arcturus Therapeutics, Inc. (the “Borrower”), a wholly-owned subsidiary of the Company and the Bank entered into a Third Amendment (the “Third Amendment”) to the Loan and Security Agreement dated as of October 12, 2018 (as amended, the “Loan Agreement”).  

Pursuant to the amendment, the Bank agreed to make a term loan to the Company on October 30, 2019, in the amount of $15 million (the “Term Loan”). After repaying $10 million for the Loan the Company owed to the Bank, the resulting net increase in the indebtedness of the Company was $5 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.  The Company shall make monthly payments of interest only until the interest-only end date of April 1, 2021, which is subject to extension to October 1, 2021 upon the occurrence of an equity or expansion event and the absence of an event of default, and thereafter shall make monthly payments of principal and interest during a 30-month amortization period.    

The Term Loan may be prepaid in full at any time, provided that a prepayment fee is required to be paid by the Company upon prepayment.  The prepayment fee ranges from 0.50% to 2.00% of the prepaid principal amount depending upon the date on which the prepayment is made. In connection with the Third Amendment, the Company guaranteed the Borrower’s obligations under the Loan Agreement and pledged substantially all of its assets as security under the Loan Agreement.

The amendment also modified the Company’s covenants to extend the dates by which a selected IND must be submitted and by which the U.S. Food and Drug Administration or equivalent authority must accept the IND, and also required the Company to maintain the lesser of (i) all of its total consolidated and unrestricted cash in total deposits with the Bank or (ii) $15 million in total deposits with the Bank.

Note 6. Stockholders’ Equity

Registered Direct Offerings

In July and September of 2019, the Company entered into engagement letters with H.C. Wainwright & Co., LLC (the “Placement Agent”) relating to registered direct offerings of common stock to certain institutional investors. Pursuant to each letter agreement, the Company agreed to pay the Placement Agent a cash fee of 6.0% of the gross proceeds from each offering and reimburse the cost of expenses.

In connection therewith, on August 1, 2019, August 2, 2019 and September 26, 2019, the Company and certain Investors entered into securities purchase agreements relating to the issuance and sale of shares of common stock. The purchase price per share for each share offered in the offerings was $11.50. The aggregate gross proceeds of the offerings were $23.0 million for an aggregate of 1,995,653 shares of common stock.

The net proceeds to the Company from the Offering, after deducting Placement Agent fees and the Company’s estimated offering expenses, were approximately $21.3 million. The Offerings closed on August 5, 2019 and September 30, 2019, respectively.

The offer and sale of the common stock was registered under the Securities Act of 1933, as amended (the “Securities Act”), on the Company’s Registration Statement on Form S-3 (Registration No. 333-232281), previously filed with the Securities and Exchange Commission and declared effective on July 29, 2019.

15


 

Equity Purchase Agreement

On June 18, 2019, the Company entered into an Equity Purchase Agreement (the “Expanded Ultragenyx Agreement”) with Ultragenyx. Pursuant to the terms of the Expanded Ultragenyx Agreement, the Company sold an aggregate of 2,400,000 shares of common stock, par value $0.001 per share (“Common Stock”) at a price of $10.00 per share to Ultragenyx on June 19, 2019. Pursuant to the Expanded Ultragenyx Agreement, the Company also granted Ultragenyx a two-year option (the “Option”) to purchase up to 600,000 additional shares of Common Stock at a price of $16.00 per share.

The Option to purchase additional shares of Common Stock may not be exercised if Ultragenyx’s ownership of the Company’s common stock would exceed 19.99% of the Company’s total shares outstanding following such exercise. The option was recorded as a component of stockholders’ equity within additional paid-in capital.

Pursuant to the terms of the Expanded Ultragenyx Agreement, until the later of (i) the first anniversary of the closing date or (ii) the date on which Ultragenyx beneficially owns less than 8.0% of the total voting power of the Company, at each annual stockholders meeting or any stockholders meeting at which members of the board of directors (the “Board”) are to be elected, the Company must nominate one director designated by Ultragenyx (the “Ultragenyx Designee”). Additionally, the Ultragenyx Designee has the contractual right to be appointed to all Board committees (subject to applicable NASDAQ rules). Ultragenyx also has the right to have a designee attend Board meetings as a non-voting observer.

In connection with the Expanded Ultragenyx Agreement, the Company and Ultragenyx entered into a Registration Rights Agreement (the “Registration Rights Agreement”). The Registration Rights Agreement requires the Company to file a registration statement providing for the resale of the shares within 180 days of June 18, 2019, and provides Ultragenyx with certain “piggy-back” registration rights with respect to registration statements that the Company may file.

Restricted Common Shares

In March 2013, the founders of the Company purchased 2,783,686 shares of common stock for $0.0068 per share. Of the shares purchased, 1,538,353 were subject to a repurchase option whereby the Company has an option for two months after date of termination of service to repurchase any or all of the unvested shares at the original purchase price per share. The repurchase option shall be deemed to be automatically exercised by the Company as of the end of the two-month period unless the Company notifies the purchaser that it does not intend to exercise its option. The shares will be vested (1) 25% after obtaining suitable siRNA license; (2) 25% after in vivo proof-of-concept achieved; (3) 25% after a regulatory agency new drug application (such as an Investigational New Drug application) is filed and accepted by the applicable regulatory agency; and (4) 25% after human biological proof-of-concept is achieved. The Company met the first two milestones during 2013 and 2014 leaving an unvested balance of 769,176 shares. In 2017, the stock purchase agreements were amended to clarify vesting conditions and also to accelerate the vesting of 146,510 shares resulting in a modification expense of $1,495,000. As of September 30, 2019 and 2018, there were 622,667 shares of common stock unvested and subject to the repurchase option.

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, 2019 as they were anti-dilu