Arcturus Therapeutics Holdings Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Arcturus is a clinical-stage mRNA medicines company developing treatments for rare liver and respiratory diseases and infectious-disease vaccines using its STARR technology and LUNAR delivery platform. This unaudited filing covers the quarter and six months ended June 30, 2020. The company reported that its OTC-deficiency candidate ARCT-810 had received FDA IND clearance in April, making it a clinical-stage company. The COVID-19 vaccine program was in early development at quarter-end.
Financial performance and position
Amounts below are in U.S. dollars; financial-statement figures are converted from thousands to millions.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Collaboration revenue | $2.32m | $10.15m | $4.97m | $14.50m |
| Research and development expense, net | $7.94m | $7.27m | $15.86m | $14.59m |
| General and administrative expense | $4.42m | $3.46m | $8.61m | $6.99m |
| Net loss | $10.26m | $0.69m | $20.04m | $7.57m |
| Basic and diluted loss per share | $0.55 | $0.07 | $1.20 | $0.74 |
- At June 30, cash and cash equivalents were $136.1m, with $0.1m of restricted cash. Current assets were $142.0m and current liabilities $23.0m, implying working capital of approximately $119.0m.
- Six-month operating cash use was $20.4m, versus $3.9m of cash provided in the prior-year period. Investing cash use was $0.6m; financing provided $85.7m. Cash, cash equivalents and restricted cash increased $64.8m to $136.2m.
- Long-term debt carrying value was $15.1m, with no principal payments due in 2020. The Western Alliance facility requires interest-only payments through October 2021; the company reported compliance with its covenants.
- There is no meaningful operating-profit margin to report: the company recorded an operating loss of $10.0m in Q2 and $19.5m for the first half. No income tax benefit was recorded because U.S. losses were offset by a full valuation allowance.
Material changes versus comparable periods
- Q2 collaboration revenue fell 77.1% year over year; first-half revenue fell 65.7%. Management attributed the declines mainly to the end of CureVac OTC-related reimbursements, a large Synthetic Genomics sublicense payment recognized in 2019, and lower Ultragenyx revenue recognition.
- Operating expenses rose 15.3% in Q2 and 13.4% in the first half. COVID-19 vaccine and cystic fibrosis program costs increased, while discovery-technology spending fell as resources shifted toward ARCT-810 and the vaccine program. G&A growth was attributed primarily to higher personnel costs.
- The larger net loss reflected lower collaboration revenue alongside higher operating expenses. First-half operating cash flow also shifted from inflow to outflow, in part because of working-capital movements and lower deferred-revenue inflows.
- Financing strengthened liquidity: the April public offering generated $75.3m net proceeds in the cash-flow statement, and Ultragenyx’s May option exercise generated $9.6m. Shares outstanding increased from 15.1m at year-end to 20.6m at June 30.
Outlook, risks, contingencies and notable events
- Management expects continued losses and significant cash use while developing candidates, and says additional capital may be needed. Funding needs depend on clinical progress, regulatory outcomes, manufacturing, partnerships and other factors. Failure to obtain financing could require program reductions or cessation of operations.
- Management expected LUNAR-CF to move toward an anticipated IND submission in 2021 and said COVID-19 vaccine program costs could rise as clinical development progressed. The filing does not provide quantitative revenue or earnings guidance.
- After quarter-end, the Singapore Health Sciences Authority approved the LUNAR-COV19 clinical trial application. The company also announced a binding term sheet with Israel to supply the candidate; the filing says a potential purchase commitment of up to $275m depends on negotiating a definitive supply agreement. Neither approval to proceed nor a supply term sheet establishes clinical efficacy, product approval or realized revenue.
- After quarter-end, the company completed another public offering. The notes report 4,243,395 shares at $53 per share and approximately $186.3m net proceeds; MD&A separately refers to approximately $173.0m raised. The filing’s differing proceeds descriptions should be reconciled.
- COVID-19 development risks include uncertain safety and efficacy, trial and regulatory delays, manufacturing scale-up and supply constraints, competition, possible diversion of resources from other programs, and uncertain vaccine economics. COVID-19 disruptions could also delay clinical trials and supply chains.
- A former employee’s lawsuit seeks $30.0m, including punitive and emotional-distress damages. The company disputes the allegations and intends to defend the matter, but says it cannot estimate a potential loss or range.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the July offering’s share count and proceeds disclosures, including the $186.3m net proceeds in the notes versus approximately $173.0m in MD&A, and compare them with shares outstanding reported as of August 5.
- Confirm whether Israel and Singapore supply or funding arrangements become definitive, and what milestones, obligations and economics apply.
- Track clinical-trial initiation, enrollment, safety and efficacy data for ARCT-810 and LUNAR-COV19, along with the anticipated LUNAR-CF IND timeline.
- Assess cash runway against ongoing operating cash use, program spending and the company’s stated need for potential additional financing; consider dilution and the filing’s warning that few authorized shares remained available for issuance.
- Monitor the $30.0m lawsuit and any resulting estimate, accrual or change in exposure.