Arcturus Therapeutics Holdings Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless otherwise noted. The company is a preclinical RNA medicines developer whose operations are primarily research and development, funded by collaborations, equity and debt.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Collaboration revenue | $3.3 | $3.4 | $17.8 | $8.2 |
| Research and development expense, net | $7.1 | $4.0 | $21.6 | $12.1 |
| General and administrative expense | $3.9 | $3.8 | $10.9 | $17.1 |
| Operating loss | $(7.6) | $(4.4) | $(14.7) | $(21.1) |
| Net loss | $(7.4) | $(4.3) | $(15.0) | $(20.8) |
| Net loss per share, basic and diluted | $(0.56) | $(0.42) | $(1.18) | $(2.07) |
- Gross profit and operating margins are not presented; the filing reports collaboration revenue and operating expenses.
- At September 30, cash and cash equivalents were $74.2 million; total assets were $87.2 million, total liabilities $51.3 million, and stockholders’ equity $35.9 million. Accumulated deficit was $60.7 million.
- Long-term debt was $10.0 million at September 30. Nine-month operating cash flow was positive $1.1 million, versus negative $15.0 million in 2018; investing cash flow was negative $0.5 million and financing cash flow positive $36.9 million. Cash, cash equivalents and restricted cash increased $37.5 million to $74.3 million.
- Positive operating cash flow reflected working-capital movements, notably a $10.9 million increase in deferred revenue, rather than operating profitability.
Material changes and notable items
- Q3 collaboration revenue declined 3% year over year, mainly due to lower Ultragenyx reimbursement, partly offset by increased CureVac revenue recognition. Nine-month revenue more than doubled, principally reflecting the Ultragenyx agreement amendment, CureVac revenue recognition and $3.3 million of sublicense revenue related to Synthetic Genomics.
- Q3 R&D expense rose 78%, with increased ARCT-810/LUNAR-OTC development spending. Nine-month R&D rose 78%; G&A declined 37%, primarily because 2018 included $7.3 million of proxy-contest costs. The company later received a $2.4 million insurance settlement for those costs.
- In June, Ultragenyx provided $30 million in total consideration, including a $24 million purchase of 2.4 million shares and a $6 million collaboration upfront payment. It held 15.9% of the company at quarter-end and received a two-year option to purchase up to 600,000 additional shares at $16 per share. The company also completed public offerings that generated approximately $21.3 million net proceeds.
- The Cystic Fibrosis Foundation increased potential LUNAR-CF support to $15 million; Arcturus agreed to provide $5 million in matching funds. The company recognized $0.7 million of contra-R&D expense in Q3 and reported $3.3 million remaining in accrued expenses.
- CureVac terminated its co-development agreement and paid $4 million in July. The amended arrangement shortened its target-selection period and reduced the maximum targets; Arcturus regained worldwide rights to ARCT-810.
- On October 30, 2019, after quarter-end, the company amended its Western Alliance Bank facility to borrow $15 million, repay the prior $10 million loan and increase debt by a net $5 million. The amended loan matures in October 2023.
Outlook, risks and contingencies
- Management expected available financial resources to fund planned operations for at least 12 months from issuance of the financial statements. The company nevertheless expects ongoing losses and says additional financing or collaborations will be needed to execute longer-term plans; financing may not be available on acceptable terms.
- Management expected ARCT-810 to reach IND submission by early 2020 and LUNAR-CF IND submission in 2021, with related development costs expected to increase. Milestones and regulatory progress are uncertain.
- The Western Alliance loan is secured by substantially all company assets other than intellectual property, which is subject to a negative pledge. Covenant compliance was reported at September 30; failure to meet covenants or an event of default could require repayment and materially affect operations. The October amendment changed cash-deposit requirements and IND deadlines.
- Key risks include clinical and regulatory failure, continued cash burn, dependence on collaboration funding and future capital raises, possible shareholder dilution, and the possibility that development costs or timing differ from plans. The filing reported no material change to the prior annual report’s risk factors and no legal proceedings.
- Adoption of ASC 606 increased opening deferred revenue and accumulated deficit by $0.8 million. Adoption of lease accounting recognized operating lease assets and liabilities; the September 30 lease liability was $5.9 million.
Investor facts to verify
- Whether ARCT-810 meets the stated IND timing and what clinical, manufacturing and regulatory milestones require additional funding.
- How much of reported revenue and cash generation depends on partner advances, reimbursements, sublicense payments and deferred revenue, and how repeatable those receipts are.
- Cash runway assumptions, future financing needs and the effect of the October loan amendment, including interest, covenants and required bank deposits.
- Ultragenyx’s collaboration terms, equity ownership and option, and the revenue-recognition impact of the amended agreements.
- Actual CFF disbursements and Arcturus’s matching-fund obligations as LUNAR-CF advances.