Arcturus Therapeutics Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Arcturus is a preclinical RNA medicines company developing therapeutics for rare, liver, infectious, fibrotic and respiratory diseases using its LUNAR delivery platform.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Collaboration revenue | $10.153 | $2.386 | $14.503 | $4.753 |
| Research and development expense, net | $7.269 | $4.225 | $14.593 | $8.166 |
| General and administrative expense | $3.456 | $8.233 | $6.990 | $13.331 |
| Operating loss | $(0.572) | $(10.072) | $(7.080) | $(16.744) |
| Net loss | $(0.685) | $(9.950) | $(7.569) | $(16.521) |
| Net loss per share, basic and diluted | $(0.07) | $(0.99) | $(0.74) | $(1.65) |
- Cash and cash equivalents were $55.840 million at June 30, 2019, versus $36.709 million at December 31, 2018; cash, cash equivalents and restricted cash totaled $55.947 million.
- Six-month operating cash flow was positive $3.929 million, compared with negative $8.202 million in 2018. The 2019 result included a $12.773 million increase in deferred revenue, so operating cash generation was supported by advance billings and collections.
- Investing cash outflow was $0.344 million; financing cash inflow was $15.546 million, principally related to the Ultragenyx transaction. Cash increased by $19.131 million over the six-month period.
- Total assets were $70.940 million and total liabilities were $49.322 million at June 30. Current assets were $63.338 million and current liabilities $16.414 million. Long-term debt was $9.980 million; deferred revenue totaled $27.382 million, including current and non-current amounts.
- No gross profit or gross margin is presented; the filing reports collaboration revenue and operating expenses rather than product sales and cost of sales.
Changes and drivers versus prior periods
- Q2 collaboration revenue rose $7.767 million year over year; six-month revenue increased $9.750 million. Management attributed the increase mainly to the Ultragenyx Amendment 3, CureVac-related revenue, and sublicense revenue from Synthetic Genomics. Q2 revenue also benefited from a $1.1 million cumulative catch-up adjustment associated with the Ultragenyx contract modification.
- R&D expense increased 72% in Q2 and 79% for the six-month period, reflecting greater ARCT-810/OTC program spending, personnel costs and facilities expenses. Six-month ARCT-810 expense increased to $5.830 million from $1.372 million.
- G&A expense declined substantially because 2018 included significant proxy-contest costs: $4.9 million in Q2 and $7.3 million for the six-month period. The company also incurred redomiciliation-related expenses in 2019.
- Net loss narrowed substantially, but the company remained loss-making and has an accumulated deficit of $53.246 million. The improved comparison reflects higher collaboration revenue and lower prior-year proxy-contest expense.
Outlook, risks and notable events
- Management expects continued losses and cash investment in research, preclinical work, manufacturing and clinical development. It stated that available resources, including the August 2019 financing, should fund operations for at least 12 months after the financial statements were filed. It also expects to need additional capital over the longer term; there is no assurance that financing will be available on acceptable terms.
- Management said ARCT-810 was expected to reach IND submission by early 2020. Following the July 2019 Cystic Fibrosis Foundation amendment, LUNAR-CF development was expected to advance toward an IND submission in late 2020.
- Ultragenyx paid $30 million in connection with its June 2019 amendment and equity purchase: $24 million for 2.4 million shares at $10 per share and a $6 million upfront collaboration payment. It also received a two-year option for up to 600,000 additional shares at $16 per share, subject to an ownership cap. Ultragenyx held 18.3% of the company at June 30.
- The Western Alliance Bank loan carries interest at prime plus 1.25%, matures October 2022, and is secured by company assets other than intellectual property. It includes financial and development-related covenants; the company reported compliance at June 30. The required IND submission and approval dates were extended to May 31, 2020 and June 30, 2020, respectively, following the Ultragenyx equity investment.
- After quarter-end, CureVac and Arcturus terminated their co-development agreement; CureVac paid a one-time $4 million settlement in July, and Arcturus reassumed worldwide rights to ARCT-810. In August, the Cystic Fibrosis Foundation increased its award for LUNAR-CF to $15 million, with $5 million of matching funds required from Arcturus and revised royalty and other terms.
- A registered direct offering closed August 5, 2019, raising $13.2 million gross and an estimated $12.2 million net from 1,145,653 shares sold at $11.50 each. Together with the CureVac payment, management reported more than $17 million of additional post-quarter capital.
- Key risks include clinical and regulatory uncertainty, dependence on external financing and collaboration partners, possible failure to meet debt covenants or development milestones, and the potential need to scale back programs if funding is insufficient. The filing reported no material change to the risk factors in the 2018 Form 10-K and no legal proceedings.
Important facts for investors to verify
- Whether management’s stated cash runway assumptions remain valid as R&D spending rises, and how cash use compares with the timing of collaboration receipts.
- Progress and timing for ARCT-810 and LUNAR-CF IND submissions, including any material changes to development plans or costs.
- The terms, funding schedule, matching-fund obligations, royalties and termination provisions in the amended Cystic Fibrosis Foundation award.
- Revenue composition and sustainability, including the impact of Ultragenyx’s catch-up revenue, CureVac-related revenue and Synthetic Genomics sublicensing.
- Compliance with Western Alliance debt covenants and the remaining debt, interest and repayment obligations.
- Potential dilution and governance effects from Ultragenyx’s 18.3% ownership, its additional-share option and the August offering.