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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2021

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 August 5, 2021, the registrant had 26,327,077 shares of voting common stock outstanding.

 

 

 


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

Page

PART I.

FINANCIAL INFORMATION

1

Item 1.

Financial Statements (unaudited)

1

 

Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

1

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2021 and 2020

2

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020

3

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020

5

 

Notes to Condensed Consolidated Financial Statements

6

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

28

PART II.

OTHER INFORMATION

29

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

31

Signatures

34

 


i


 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or this quarterly report, including the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the documents incorporated by reference herein may contain “forward-looking statements” within the meaning of the federal securities laws made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under Part II, Item 1A, “Risk Factors” in this quarterly report. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise. These statements, which represent our current expectations or beliefs concerning various future events, may contain words such as “may,” “will,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” or other words indicating future results, though not all forward-looking statements necessarily contain these identifying words. Such statements may include, but are not limited to, statements concerning the following:

 

 

the initiation, cost, timing, progress and results of, and our expected ability to undertake certain activities and accomplish certain goals with respect to, our research and development activities, preclinical studies and clinical trials;

 

 

our ability to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations, and/or warnings in the label of an approved product candidate;

 

 

 

our ability to obtain and deploy funding for our operations;

 

 

our ability to continue as a going concern;

 

 

our plans to research, develop and commercialize our product candidates;

 

 

our strategic alliance partners’ election to pursue development and commercialization of any programs or product candidates that are subject to our collaboration and license agreements with such partners;

 

 

 

our ability to attract collaborators with relevant development, regulatory and commercialization expertise;

 

 

future activities to be undertaken by our strategic alliance partners, collaborators, joint ventures and other third parties;

 

 

our ability to avoid, settle or be victorious at costly litigation with shareholders, former executives or others, should these situations arise;

 

 

our ability to obtain and maintain intellectual property protection for our product candidates;

 

 

the size and growth potential of the markets for our product candidates, and our ability to serve those markets;

 

 

our ability to successfully commercialize, and our expectations regarding future therapeutic and commercial potential with respect to, our product candidates;

 

 

 

the rate and degree of market acceptance of our product candidates;

 

 

our ability to develop sales and marketing capabilities, whether alone or with potential future collaborators;

 

 

regulatory developments in the United States and foreign countries;

 

 

our ability to attract and retain experienced and seasoned scientific and management professionals;

 

our ability to identify and consummate arrangements with strategic partners or foreign governments to defray the costs of clinical trials for our product candidates;

 

 

our ability to establish, maintain and scale-up manufacturing operations, including those of our contract manufacturers;

 

 

the performance of our third-party suppliers and manufacturers;

 

 

the success of competing therapies that are or may become available; and

 

 

the accuracy of our estimates regarding future expenses, future revenues, capital requirements and need for additional financing.

 

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or performance to differ materially from those projected. These statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements. In addition, historic results of scientific research, preclinical and clinical trials do not guarantee that future research or trials will suggest the same conclusions, nor that historic results referred to herein will be interpreted the same in light of additional research, preclinical and clinical trial results. The forward-looking statements contained in this quarterly report are subject to risks and uncertainties, including those discussed in our other filings with the United States Securities and Exchange Commission, or the SEC. Readers are cautioned

ii


not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

iii


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value information)

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

433,574

 

 

$

462,895

 

Accounts receivable

 

 

2,163

 

 

 

2,125

 

Prepaid expenses and other current assets

 

 

2,301

 

 

 

2,769

 

Total current assets

 

 

438,038

 

 

 

467,789

 

Property and equipment, net

 

 

3,407

 

 

 

3,378

 

Operating lease right-of-use asset, net

 

 

6,341

 

 

 

5,182

 

Equity-method investment

 

 

920

 

 

 

 

Non-current restricted cash

 

 

107

 

 

 

107

 

Total assets

 

$

448,813

 

 

$

476,456

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,084

 

 

$

10,774

 

Accrued liabilities

 

 

42,614

 

 

 

20,639

 

Deferred revenue

 

 

18,071

 

 

 

18,108

 

Total current liabilities

 

 

70,769

 

 

 

49,521

 

Deferred revenue, net of current portion

 

 

9,850

 

 

 

12,512

 

Long-term debt, net of current portion

 

 

56,309

 

 

 

13,845

 

Operating lease liability, net of current portion

 

 

5,359

 

 

 

4,025

 

Other long-term liabilities

 

 

878

 

 

 

 

Total liabilities

 

$

143,165

 

 

$

79,903

 

Stockholders’ equity

 

 

 

 

 

 

 

 

Common stock: $0.001 par value; 60,000 shares authorized; 26,327 issued and

   outstanding at June 30, 2021 and 26,192 issued and outstanding at December 31, 2020

 

 

26

 

 

 

26

 

Additional paid-in capital

 

 

560,365

 

 

 

540,343

 

Accumulated deficit

 

 

(254,743

)

 

 

(143,816

)

Total stockholders’ equity

 

 

305,648

 

 

 

396,553

 

Total liabilities and stockholders’ equity

 

$

448,813

 

 

$

476,456

 

 

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)

(in thousands except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

Collaboration revenue

 

$

2,001

 

 

$

2,322

 

 

$

4,128

 

 

$

4,968

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development, net

 

 

45,679

 

 

 

7,944

 

 

 

95,729

 

 

 

15,861

 

 

General and administrative

 

 

10,042

 

 

 

4,420

 

 

 

19,785

 

 

 

8,611

 

 

Total operating expenses

 

 

55,721

 

 

 

12,364

 

 

 

115,514

 

 

 

24,472

 

 

Loss from operations

 

 

(53,720

)

 

 

(10,042

)

 

 

(111,386

)

 

 

(19,504

)

 

(Loss) gain from equity-method investment

 

 

(328

)

 

 

(100

)

 

 

920

 

 

 

(263

)

 

(Loss) gain from foreign currency

 

 

(13

)

 

 

 

 

 

417

 

 

 

 

 

Finance expense, net

 

 

(520

)

 

 

(121

)

 

 

(878

)

 

 

(273

)

 

Net loss

 

$

(54,581

)

 

$

(10,263

)

 

$

(110,927

)

 

$

(20,040

)

 

Net loss per share, basic and diluted

 

$

(2.07

)

 

$

(0.55

)

 

$

(4.22

)

 

$

(1.20

)

 

Weighted-average shares outstanding, basic and diluted

 

 

26,323

 

 

 

18,794

 

 

 

26,284

 

 

 

16,657

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(54,581

)

 

$

(10,263

)

 

$

(110,927

)

 

$

(20,040

)

 

Comprehensive loss

 

$

(54,581

)

 

$

(10,263

)

 

$

(110,927

)

 

$

(20,040

)

 

 

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)

in thousands

 

Three Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

BALANCE – March 31, 2021

 

 

26,319

 

 

$

26

 

 

$

552,743

 

 

$

(200,162

)

 

$

352,607

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(54,581

)

 

 

(54,581

)

Share-based compensation expense

 

 

 

 

 

 

 

 

7,540

 

 

 

 

 

 

7,540

 

Issuance of common stock upon exercise of stock options

 

 

8

 

 

 

 

 

 

82

 

 

 

 

 

 

82

 

BALANCE – June 30, 2021

 

 

26,327

 

 

$

26

 

 

$

560,365

 

 

$

(254,743

)

 

$

305,648

 

 

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

BALANCE – March 31, 2020

 

 

15,157

 

 

$

15

 

 

$

98,412

 

 

$

(81,445

)

 

$

16,982

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(10,263

)

 

 

(10,263

)

Issuance of common stock, net of issuance costs

 

 

4,735

 

 

 

5

 

 

 

75,300

 

 

 

 

 

 

75,305

 

Issuance of common stock to Ultragenyx on option exercise

 

 

600

 

 

 

1

 

 

 

9,599

 

 

 

 

 

 

9,600

 

Issuance of common stock upon exercise of stock options

 

 

118

 

 

 

 

 

 

698

 

 

 

 

 

 

698

 

Share-based compensation expense

 

 

 

 

 

 

 

 

1,101

 

 

 

 

 

 

1,101

 

BALANCE – June 30, 2020

 

 

20,610

 

 

$

21

 

 

$

185,110

 

 

$

(91,708

)

 

$

93,423

 

3


 

 

Six Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

BALANCE – December 31, 2020

 

 

26,192

 

 

$

26

 

 

$

540,343

 

 

$

(143,816

)

 

$

396,553

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(110,927

)

 

 

(110,927

)

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

 

 

75

 

 

 

 

 

 

5,000

 

 

 

 

 

 

5,000

 

Share-based compensation expense

 

 

 

 

 

 

 

 

14,527

 

 

 

 

 

 

14,527

 

Issuance of common stock upon exercise of stock options

 

 

60

 

 

 

 

 

 

495

 

 

 

 

 

 

495

 

BALANCE – June 30, 2021

 

 

26,327

 

 

$

26

 

 

$

560,365

 

 

$

(254,743

)

 

$

305,648

 

 

Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

BALANCE – December 31, 2019

 

 

15,138

 

 

$

15

 

 

$

97,445

 

 

$

(71,668

)

 

$

25,792

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(20,040

)

 

 

(20,040

)

Issuance of common stock, net of issuance costs

 

 

4,735

 

 

 

5

 

 

 

75,300

 

 

 

 

 

 

75,305

 

Issuance of common stock to Ultragenyx on option exercise

 

 

600

 

 

 

1

 

 

 

9,599

 

 

 

 

 

 

9,600

 

Issuance of common stock upon exercise of stock options

 

 

137

 

 

 

 

 

 

816

 

 

 

 

 

 

816

 

Share-based compensation expense

 

 

 

 

 

 

 

 

1,950

 

 

 

 

 

 

1,950

 

BALANCE – June 30, 2020

 

 

20,610

 

 

$

21

 

 

$

185,110

 

 

$

(91,708

)

 

$

93,423

 

 

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

 

4


 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

in thousands

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(110,927

)

 

$

(20,040

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

594

 

 

 

394

 

Share-based compensation expense

 

 

14,527

 

 

 

1,950

 

Acquired in-process research and development expense

 

 

5,000

 

 

 

 

(Gain) loss from equity-method investment

 

 

(920

)

 

 

263

 

Foreign currency transaction gain

 

 

(417

)

 

 

 

Other non-cash expenses

 

 

1,583

 

 

 

654

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(38

)

 

 

(650

)

Prepaid expense and other assets

 

 

468

 

 

 

(2,302

)

Accounts payable

 

 

(791

)

 

 

(1,442

)

Accrued liabilities

 

 

17,727

 

 

 

3,619

 

Deferred revenue

 

 

(2,699

)

 

 

(2,798

)

Net cash used in operating activities

 

 

(75,893

)

 

 

(20,352

)

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(522

)

 

 

(611

)

Net cash used in investing activities

 

 

(522

)

 

 

(611

)

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

46,599

 

 

 

 

Proceeds from issuance of common stock, net of issuance costs

 

 

 

 

 

75,305

 

Proceeds from the issuance of common stock to Ultragenyx on option exercise

 

 

 

 

 

9,600

 

Proceeds from exercise of stock options

 

 

495

 

 

 

816

 

Net cash provided by financing activities

 

 

47,094

 

 

 

85,721

 

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

 

 

(29,321

)

 

 

64,758

 

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

 

 

463,002

 

 

 

71,460

 

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

 

$

433,681

 

 

$

136,218

 

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

173

 

 

$

180

 

Non-cash investing activities

 

 

 

 

 

 

 

 

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

 

$

1,828

 

 

$

674

 

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

 

$

5,000

 

 

$

 

Purchase of property and equipment in accounts payable

 

$

101

 

 

$

44

 

 

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

 

 

 

5


 

 

ARCTURUS THERAPEUTICS HOLDINGS INC. AND ITS SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Description of Business

Arcturus Therapeutics Holdings Inc. (the “Company”) is a global clinical-stage messenger RNA medicines company focused on development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases. The Company became a clinical stage company during 2020 when it announced that its Investigational New Drug (“IND”) application for ornithine transcarbamylase (“OTC”) deficiency was deemed allowed to proceed by the U.S. Food and Drug Administration (“FDA”), and its Clinical Trial Application (“CTA”) candidate LUNAR-COV19 was approved to proceed by the Singapore Health Sciences Authority.

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, 2020.

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

Joint Ventures, Equity Method Investments and Variable Interest Entities

Investments for which the Company exercises significant influence but does not have control are accounted for under the equity method. Equity method investment activity is related to a 49% joint venture with Axcelead, Inc. (see the following paragraph for further details) and a 12% ownership in Vallon Pharmaceuticals, Inc. (see “Note 10, Related Party Transactions” for further details). The Company’s share of the investees results is presented as either income or loss from equity method investees in the accompanying condensed consolidated statements of operations.

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

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

6


 

The equity method of accounting is applicable for the JV Entity as the Company does not own more than 50% of voting power, but has influence over the operation and financial policies of the investee. The Company will account for its investment in the JV Entity using the equity method of accounting as specified in ASC 323, Investments — Equity Method and Joint Ventures. Under ASC 323, equity method investments are recorded initially at cost. The Company’s initial investment in the JV Entity totaled $9.2 million. However, Arcalis paid the Company back the initial investment of $9.2 million as an upfront fee/consideration for the License and Technology Transfer Agreement. In substance, there was no cash consideration paid by the Company for its 49% equity interest in the JV Entity. After this initial measurement, an equity method investment is adjusted at each reporting period to recognize the investor’s share of the earnings, losses and/or changes in capital of the investee after the date of acquisition. Losses are only recognized to the extent the value of the investment is greater than zero.

Liquidity

The Company has incurred significant operating losses since its inception. As of June 30, 2021 and December 31, 2020, the Company had an accumulated deficit of $254.7 million and $143.8 million, respectively.

The Company’s activities since inception have consisted principally of research and development activities, general and administrative activities, and raising capital. The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding before the Company achieves sustainable revenues and profit from operations. From the Company’s inception through June 30, 2021, the Company has funded its operations principally with the sale of capital stock, revenues earned through collaboration agreements, and proceeds from long-term debt. During the first quarter of 2021, the Company elected to borrow and the Economic Development Board of the Republic of Singapore (the “EDB”) agreed to make a term loan of S$62.1 million (approximately USD$46.6 million) to support the manufacture of the LUNAR-COV19 vaccine candidate. Additionally, through underwritten public offerings during fiscal year 2020, the Company raised net proceeds of $423.8 million, after deducting underwriting discounts, commissions, and offering expenses.

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

Segment Information

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

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

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

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

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

7


 

Leases

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

Research and Development, Net

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

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

Pre-Launch Inventory

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

Statement of Cash Flows

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

 

(in thousands)

 

June 30, 2021

 

 

June 30, 2020

 

Cash and cash equivalents

 

$

433,574

 

 

$

136,111

 

Non-current restricted cash

 

 

107

 

 

 

107

 

Total cash, cash equivalents and restricted

   cash shown in the statement of cash flows

 

$

433,681

 

 

$

136,218

 

 

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.

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 if and when certain research and development milestones or technology transfer milestones are achieved, royalties on approved product sales and reimbursement for research and development activities. The Company’s costs of performing these services are included within research and development expenses. The Company’s milestone payments are typically defined by achievement of certain preclinical, clinical, and commercial success criteria. Preclinical milestones may include in vivo proof of concept in disease animal models, lead candidate identification, and completion of IND-enabling toxicology studies. Clinical milestones may, for example, include successful enrollment of the first patient in or completion of Phase 1, 2 and 3 clinical trials, and commercial milestones are often tiered based on net or aggregate sale amounts. The Company cannot guarantee the achievement of these milestones due to risks associated with preclinical and clinical activities required for development of nucleic acid medicine-based therapeutics.

8


 

The following table presents changes during the six months ended June 30, 2021 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, 2020

 

$

2,125

 

Additions for revenue recognized from billings

 

 

1,429

 

Deductions for cash collections

 

 

(1,391

)

BALANCE – June 30, 2021

 

$

2,163

 

 

 

 

 

 

(in thousands)

 

Contract Liabilities

 

BALANCE - December 31, 2020

 

$

30,620

 

Additions for advanced billings

 

 

1,429

 

Deductions for promised services provided in current period

 

 

(4,128

)

BALANCE – June 30, 2021

 

$

27,921

 

 

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

 

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Collaboration Partner – Janssen

 

$

769

 

 

$

693

 

 

$

1,593

 

 

$

1,590

 

Collaboration Partner – Ultragenyx

 

 

925

 

 

 

913

 

 

 

1,850

 

 

 

1,824

 

Collaboration Partner – CureVac

 

 

247

 

 

 

231

 

 

 

472

 

 

 

540

 

Collaboration Partner – Other

 

 

60

 

 

 

485

 

 

 

213