Arcturus Therapeutics Holdings Inc.: Form 10-Q for the period ended Sep 30, 2023

The following is a discussion of the financial condition and results of operations of Arcturus Therapeutics Holdings Inc. for the three and nine month periods ended September 30, 2023. Unless otherwise specified herein, references to the “Company,” “Arcturus,” “we,” “our” and “us” mean Arcturus Therapeutics Holdings Inc. and its consolidated subsidiaries. You should read the following discussion and analysis together with the interim condensed consolidated financial statements and related notes included elsewhere herein. For additional information relating to our management’s discussion and analysis of financial conditions and results of operations, please see our Annual Report on Form 10 K for the year ended December 31, 2022 (the “2022 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (the “Commission”) on March 29, 2023. Unless otherwise defined herein, capitalized words and expressions used herein shall have the same meanings ascribed to them in the 2022 Annual Report.

This report includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements.

You should read this report and the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. You should also review the factors and risks we describe in the reports we will file or submit from time to time with the Commission after the date of this report.

Overview

We are a global late-stage clinical messenger RNA medicines company focused on the development of infectious disease vaccines and opportunities within liver and respiratory rare diseases. In addition to our messenger RNA (“mRNA”) platform, our proprietary lipid nanoparticle (“LNP”) delivery system, LUNAR®, has the potential to enable multiple nucleic acid medicines, and our proprietary self-amplifying mRNA technology (Self-Transcribing and Replicating RNA, or STARR®, technology) has the potential to provide longer-lasting RNA and sustained protein expression at lower dose levels as compared to conventional mRNA.

We are leveraging our proprietary LUNAR® platform and our nucleic acid technologies to develop and advance a pipeline of mRNA-based vaccines and therapeutics for infectious diseases and rare genetic disorders with significant unmet medical needs. We continue to expand this platform by adding new innovative delivery solutions that allow us to expand our discovery efforts. Our proprietary LUNAR® technology is intended to address the major hurdles in RNA drug development, namely the effective and safe delivery of RNA therapeutics to disease-relevant target tissues. We believe the versatility of our platform to target multiple tissues, its compatibility with various nucleic acid therapeutics, and our expertise in developing scalable manufacturing processes can allow us to deliver on the next generation of nucleic acid medicines.

Business Updates

Updates on Vaccine Program

In November 2022, we entered into a Collaboration and License Agreement (the “CSL Collaboration Agreement”) with Seqirus, Inc. (“CSL Seqirus”), a part of CSL Limited, and one of the world’s leading influenza vaccine providers, for global exclusive rights to research, develop, manufacture and commercialize self-amplifying mRNA vaccines against COVID-19, influenza and three other respiratory infectious diseases and global non-exclusive rights to pandemic pathogens. The CSL Collaboration Agreement became effective on December 8, 2022. The collaboration combines CSL Seqirus’ established global vaccine commercial and manufacturing infrastructure with Arcturus’ manufacturing expertise and innovative STARR® self-amplifying mRNA vaccine and LUNAR® delivery platform technologies. Under the framework of our collaboration with CSL Seqirus, we continue the development of the COVID-19 vaccine to establish a differentiated platform and address routine recommendations for periodic vaccine composition updates in a timely manner. On August 10, 2023, we entered into an amendment to the CSL Collaboration Agreement, pursuant to which CSL Seqirus agreed to make a $17.5 million milestone payment related to a development milestone for the LUNAR-FLU program under the collaboration. We plan to initiate a Phase 1 clinical study with a candidate influenza vaccine during the fourth quarter of 2023 as a part of this collaboration program.

COVID Collaboration Program Updates

Pursuant to a third party study agreement executed in December 2022 with Meiji Seika Pharma Co., Ltd., a subsidiary of Meiji Holdings Co., Ltd. (“Meiji”), a Japanese leader in the area of infectious disease, a Phase 3 clinical trial of ARCT-154 was initiated in Japan by Meiji to evaluate safety and immunogenicity of a booster shot of ARCT-154, and to evaluate non-inferiority and superiority of ARCT-154 as a booster. The trial targeted a total of 780 adult participants, with half in the ARCT-154 group and half in a comparator group (Comirnaty®, Pfizer-BioNTech), and completed enrollment with 828 participants in February 2023. The interim results of this study demonstrated immunological non-inferiority and superiority of ARCT-154 over the conventional mRNA vaccine as measured by neutralizing antibodies against ancestral SARS-CoV-2 strain and Omicron BA.4/5 subvariant, which was dominated during the study period. In September 2023, we achieved a development milestone related to the completion of the first GMP batch manufacture of drug product in a multi-dose vial for clinical studies in the SARS-CoV-2 field.

On July 13, 2023, an article with the study results titled “Booster dose of self-amplifying SARS-CoV-2 RNA vaccine vs. mRNA vaccine: a Phase 3 comparison of ARCT-154 with Comirnaty” was posted on medRxiv.org at https://www.medrxiv.org/content/10.1101/2023.07.13.23292597v1. Following the completion of the peer review by Lancet Infectious Diseases in October 2023, the journal accepted the manuscript, which should be published by the end of the year. In August 2023, we submitted the primary manuscript with efficacy, immunogenicity and safety results of the pivotal Phase 1/2/3 clinical study of ARCT-154 in Vietnam that completed dosing of over 19,000 participants in 2022. The preprint of this article is available on https://doi.org/10.21203/rs.3.rs-3329097/v1. The peer review of the manuscript is ongoing by Nature Communications.

On August 7, 2023, we announced that Phase 1/2 clinical trial data demonstrated one-year durability of immune response following ARCT-154 booster vaccine administration as measured using validated microneutralization (MNT) assays. The geometric mean fold rise (GMFR) in neutralizing antibodies remained greater than 10-fold above baseline for one year across a panel of SARS-CoV-2 variants, including ancestral strain with the D614G mutation, Beta (B.1.351), Delta (B.1.617.2), and Omicron (BA.1, BA.2 and BA.4/5), for participants receiving ARCT-154 booster. The results of this study were presented as a poster at the 9th Influenza Conference of the European Scientific Working Group on Influenza (ESWI) in Valencia, Spain.

Geometric mean fold rise (GMFR) of neutralizing antibodies against SARS-CoV-2 variants (versus pre-booster levels) after ARCT-154 booster vaccination measured by validated psuedoviral microneutralization assays (N=12). Error bars represent the 95% CI. Participants who received any COVID-19 vaccines or had laboratory-confirmed SARS-CoV-2 infection during the follow-up period were excluded from immunogenicity analysis at sampling times after the event.

On November 1, 2023, at the 11th mRNA conference in Berlin, we presented the preliminary 6-month durability data of immune response of our COVID-19 vaccine candidate, ARCT-154, compared to the licensed conventional mRNA vaccine (Comirnaty) from the Phase 3 study in Japan that completed enrollment in February 2023 is now available. The results indicate a superior antibody persistence of our COVID-19 vaccine over the comparator, as measured by pseudoviral neutralization assays with ancestral SARS-CoV-2 strain and Omicron BA.4/5 subvariant.

On September 29, 2023, CSL's Japanese distribution partner, Meiji, initiated a Phase 3 clinical study with a bivalent version of our COVID-19 vaccine candidate (ancestral strain, ARCT-154 and Omicron BA.4/5) to further support immunogenicity and safety of our self-amplifying mRNA platform and which may facilitate the timely release of future seasonal updates of our COVID-19 vaccine against evolving variants of concern. The study is enrolling healthy adults and individuals with comorbidities, who previously received 2-4 doses of mRNA COVID-19 vaccines, including the last booster at least 3 months prior to recruitment, and has exceeded the targeted enrollment of 850 participants ahead of schedule. The study will compare the investigational vaccine, ARCT-2301 and COMIRNATY (ancestral strain and BA.4/5), for evaluation of safety and immunogenicity between observer-blind groups. Preliminary results of his study are expected by the end of Q1 2024. The results of this study of the bivalent version of our COVID-19 vaccine candidate are not required for approval of ARCT-154 in Japan but will facilitate the timely release of future seasonal updates of the COVID-19 vaccine without the need for additional clinical data.

On September 5, 2023, we announced that the European Medicines Agency (EMA) validated the marketing authorization application (MAA) for ARCT-154, a next generation mRNA vaccine, for active immunization to prevent COVID-19 caused by SARS-CoV-2 in individuals 18 years of age and older.

Flu Collaboration Program Updates

On August 10, 2023, we entered into an amendment to the CSL Collaboration Agreement, pursuant to which CSL Seqirus agreed to make a $17.5 million milestone payment related to a development milestone for the LUNAR-FLU program under the collaboration. We received this milestone payment during the quarter ended September 30 2023 and the Company intends to use the proceeds from this milestone payment to fund the Company’s development activities under the LUNAR-FLU program, including the initiation of Phase 1 clinical study.

We have generated a comprehensive non-clinical data package to support the initiation of the Phase 1 clinical trial with a novel influenza mRNA vaccine candidate. All necessary approvals to initiate the Phase 1 study have been received.

Key Updates on Arcturus-Owned mRNA Therapeutic Development Candidates

The following chart represents our current pipeline of Arcturus-Owned mRNA Therapeutic Candidates:

• LUNAR-OTC/ARCT-810 - We remain committed to our rare disease program for ornithine transcarbamylase (OTC) deficiency.
• A Phase 1b study in stable OTC-deficient adults is being conducted in the United States. The trial is designed to assess safety, tolerability and pharmacokinetics of a single dose of ARCT-810, as well as various exploratory biomarkers of drug activity. The study has completed enrollment and dosing of all four cohorts (N = 16 subjects). We expect the final database lock to occur in the fourth quarter of 2023.
• A Phase 2 multiple-dose study of ARCT-810 in OTC-deficient adolescents and adults initiated dosing in December 2022 and plans to enroll approximately 24 participants in 2 dose cohorts. The study has been approved by the regulatory authorities in the UK and several other countries in Europe. We are taking various actions to address the continued challenging enrollment rate in Europe, by adding study sites and patient services to eliminate barriers to participation.
• In June 2023, the US Food and Drug Administration (the “FDA”) granted Fast Track Designation to ARCT-810. Fast Track Designation is designed to facilitate development and expedite review of new therapeutics intended to treat serious or life-threatening conditions that demonstrate the potential to address important unmet medical needs.
• In June 2023, ARCT-810 received Rare Pediatric Disease Designation from the FDA. Such designation is designed to recognize rare pediatric diseases in which the serious or life-threatening manifestations primarily affect patients from birth to 18 years of age. Due to such designation, if ARCT-810 achieves approval for a pediatric indication in the original rare pediatric disease product application in the United States, Arcturus (or the sponsor of ARCT-810) will receive a voucher for priority review of a subsequent marketing application for a different product.
• LUNAR-CF/ARCT-032 – Our program for cystic fibrosis is being supported in part by the Cystic Fibrosis Foundation.
• Results from preclinical studies demonstrate robust protein expression in respiratory epithelium treated with LUNAR-mRNA in vitro and in vivo. Further, CF human bronchial epithelial cells treated with ARCT-032 in vitro demonstrate restoration of CFTR activity.
• A CTA was filed in December 2022 for the first-in-human study, and we completed dosing of the Phase 1 single ascending dosing study in 32 healthy participants (eight subjects in each of four cohorts).
• In August 2023 we received regulatory approval of a protocol amendment to allow the transition to a Phase 1b clinical study of ARCT-032 in up to eight adults with CF, with each participant receiving two administrations of ARCT-032. We initiated Phase 1b enrollment in October 2023, with dosing of first participant scheduled in November 2023.
• In September 25, 2023, we entered into an amendment to our Development Program Letter Agreement with the Cystic Fibrosis Foundation Agreement. Please see “Updates on Collaboration Agreements” – “Cystic Fibrosis Foundation Agreement”.
• On October 25, 2023, ARCT-032 received Rare Pediatric Disease Designation from the FDA. Such designation is designed to recognize rare pediatric diseases in which the serious or life-threatening manifestations primarily affect patients from birth to 18 years of age. Due to such designation, if ARCT-032 achieves approval for a pediatric indication in the original rare pediatric disease product application in the United States, Arcturus (or the sponsor of ARCT-032) will receive a voucher for priority review of a subsequent marketing application for a different product.
• In November 2023, we presented new data showing proof of activity in vivo (G551D CF Ferret model) at the North American Cystic Fibrosis Conference. The ferrets in the study require continuous treatment with the CFTR modulator ivacaftor to prevent disease progression. A single administration of ARCT-032 showed successful transfection of airway epithelial cells and restoration of mucociliary clearance of ARCT-032 above the level maintained with ivacaftor.

Updates on Collaboration Agreements

CSL Collaboration Agreement.

Please see “Business Updates” – “Updates on Vaccine Program”.

Cystic Fibrosis Foundation Agreement

On May 16, 2017, pursuant to a Development Program Letter Agreement (as amended, the “CFF Agreement”) with the Cystic Fibrosis Foundation (“CFF”), CFF agreed to award us funding for a development program to identify lead CFTR mRNA sequences and LUNAR® formulations, demonstrate tolerability of LUNAR® CFTR mRNA, and demonstrate translatability of aerosolized LUNAR®. The award includes a grant of rights to CFF know-how to assist us to research, develop, commercialize, make or otherwise exploit a product. If the award results in a successful commercialized product, we will pay CFF (i) royalties on sales of the product up to a maximum of a single-digit multiple of the total award amount actually paid to us by CFF, and (ii) thereafter, a single-digit percentage of annual net sales. Further, in the event of a license, sale or other transfer of the product or our development program technology (including a change of control transaction), we will pay CFF a percentage of such license, sale or transfer payments actually received by us or our shareholders (subject to a royalty cap). On August 1, 2019, we entered into an amendment to the CFF Agreement. Pursuant to the amendment, (i) CFF will increase the amount it will award to advance LUNAR-CF, (ii) we will provide a certain amount of matching funds for remaining budgeted costs, and (iii) the related disbursement schedule from CFF to us was modified such that (a) a disbursement was made upon execution of the amendment, (b) an agreed upon amount will be disbursed to us within thirty days of the first day of each of January, April, July and October 2020, and (c) the last payment will be disbursed upon us invoicing CFF to meet good manufacturing practices and submitting an IND application. In January 2022, the parties signed an additional amendment for CFF to fund the development of a CF ferret model for application in the development of ARCT-032, our LUNAR-CF candidate.

On September 25, 2023, we entered into an additional amendment (the “Fourth Amendment”) to the CFF Agreement, pursuant to which we and CFF agreed to: (a) increase the Amount of Award (as defined in the CFF Agreement and applicable amendment) from CFF to advance LUNAR-CF by up to $9 million (for a total to date of up to approximately $25 million), and required Arcturus to provide $15 million in matching funds for remaining budgeted costs; (b) modify the existing rates and caps on royalties due to CFF under the CFF Agreement, including the addition of an option for Arcturus to reduce the royalty rate through a one-time payment; (c) modify the calculation of payments from Arcturus to CFF in the event of certain dispositions or licensing of cystic fibrosis or other pulmonary assets or of a change of control of Arcturus; and (d) make corresponding changes to exhibits, definitions and other provisions of the CFF Agreement.

CureVac

On January 1, 2018, we entered into a Development and Option Agreement with CureVac, which was amended on May 3, 2018, restated on September 28, 2018 and amended on July 24, 2019 (as amended and restated, the “Development and Option Agreement”). Under the terms of the Development and Option Agreement, CureVac and Arcturus agreed to conduct joint preclinical development programs and we granted CureVac a license to develop and commercialize certain products incorporating certain of our technology (the “Arcturus LMD Technology”) and CureVac technology. CureVac did not exercise its option to extend the term prior to its expiration, and the Development and Option Agreement expired as of July 24, 2023.

Updates on ARCALIS Joint Venture

On August 14, 2023, we announced that ARCALIS Inc. (ARCALIS), our manufacturing joint venture in Japan to support the production of mRNA vaccines and therapeutics, had been awarded up to $115 million in two separate grants from the Japanese government. We anticipate that these grants will be used to fund the construction of a factory and the purchase of capital equipment to support current Good Manufacturing Practice (cGMP) production of mRNA drug substance and mRNA drug product operations.

On October 4, 2023, we announced that ARCALIS was selected by the Japanese Ministry of Economy, Trade and Industry to receive additional financial support to construct a DNA template manufacturing facility along with new state-of-the-art equipment. DNA plasmid generated at this facility would be used as key starting material in the manufacture of mRNA drug substance at

ARCALIS’ neighboring mRNA drug substance facility, which was completed in July 2023. To date, approximately $165 million has been awarded to ARCALIS by the Japanese government, subject to certain terms and conditions, to build mRNA Drug Substance, mRNA Drug Product manufacturing capabilities and to construct a DNA template manufacturing facility. As of November 6, 2023, our ownership in ARCALIS is 36.7%.

Updates on Research and Platform Activities

We continue to conduct exploratory platform development activities, including the evaluation of genome editing, and new targeting approaches, where our LUNAR® and STARR® platforms could potentially be useful for identification and development of additional products for our portfolio.

Updates on Supply and Manufacturing

We have built a global manufacturing footprint with our partners, including Aldevron, Catalent, Recipharm, Polymun and ARCALIS. With such collaborations we have established an Integrated Global Supply Chain Network with our primary and secondary sourcing contract development & manufacturing organizations (CDMOs) based in the United States, EU and Asia for producing critical raw materials, drug substance, and packaged finished product. As the market for COVID vaccines shifts from multi-dose vial formats to lower and single-dose vial formats, we continue, with our collaborator CSL Seqirus, to evaluate and advance manufacturing process and capabilities and technology transfers, and prepare for stockpiling and commercialization of COVID vaccines.

Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Report and our audited financial statements and related notes for the year ended December 31, 2022. Our historical results of operations and the year-to-year comparisons of our results of operations that follow are not necessarily indicative of future results.

Revenue

We enter into arrangements with pharmaceutical and biotechnology partners and government agencies that may contain upfront payments, license fees for research and development arrangements, research and development funding, milestone payments, option exercise and exclusivity fees, royalties on future sales, consulting fees and payments for technology transfers. The following table summarizes our total revenues for the periods indicated:

(in thousands)

* Greater than 100%

Revenue increased by $31.8 million during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The increase was primarily attributable to $45.2 million of revenue recognized from the collaboration agreement and flu Phase I agreement with CSL Seqirus, as well as grant revenue recognized from the agreement with BARDA, which were both executed in the second half of 2022 with negligible revenue recognized during the third quarter of 2022. The increase was primarily offset by a decrease in revenue of $13.4 million related to decreased revenue recognized as a result of the termination of collaboration agreements with CureVac, UGX, Janssen and Vinbiocare.

(in thousands)

* Greater than 100%

Revenue increased by $90.2 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. The increase was attributable to an increase in revenue of $133.0 million primarily related to the collaboration agreement with CSL Seqirus and the grant agreement with BARDA which were both executed in the second half of 2022. The increase was primarily offset by decreases in revenue of the following: (i) $27.2 million related to the termination of the agreement with Vinbiocare, (ii) $12.5 million related to the agreement with the Israeli Ministry of Health, (iii) $1.9 million related to the termination of the agreement with Janssen and (iv) $1.0 million related to the termination of the agreement with UGX.

Our operating expenses consist of research and development and general and administrative expenses.

(in thousands)

Research and Development Expenses, net

The following table presents our total research and development expenses by category:

(in thousands)

* Greater than 100%

Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies and clinical trials performed by contract research organizations, clinical and regulatory consultants, personnel related expenses, facility related expenses and laboratory supplies related to conducting research and development activities. Research and development expenses were $51.1 million for the three months ended September 30, 2023, compared with $37.7 million in the comparable period last year, primarily reflecting increased clinical research and manufacturing costs of $11.6 million and an increase of $2.0 million in personnel related costs, an increase in travel and consulting expenses of $0.2 million, an increase of $0.7 million in facilities expense and offset by a decrease of contra research and development expenses recognized of $1.1 million. Research and development expenses were $155.5 million for the nine months ended September 30, 2023, compared with $120.8 million in the comparable period last year, primarily reflecting increased manufacturing costs of $27.8 million, an increase of $5.7 million in personnel related costs, an increase in consulting expenses of $1.4 million, an increase of $2.1million in facilities expense and a decrease of contra research and development expenses recognized of $1.6 million. The increase was primarily offset by a decrease of clinical-related expenses of $3.9 million. We expect that our research and development efforts and associated costs will increase and continue to be substantial over the next several years as our pipeline progresses.

Early-stage programs represent programs that are in the pre-clinical or Phase 1 clinical stage and may be partnered or unpartnered, including the LUNAR-CF and LUNAR-FLU programs. Discovery technologies represent our efforts to expand our product pipeline and are primarily related to pre-partnered studies and new capabilities assessment. For some of our programs, the activities are part of our collaborative and other relationships and the expenses may be partially offset with funds that have been awarded to the Company. The expenses primarily consist of external manufacturing costs, lab supplies, equipment, and consulting and professional fees. Both early stage programs and discovery technologies expenses are expected to steadily increase over the coming years.

Personnel related expenses primarily consist of employee salaries and benefits, share-based compensation and consultants. Although such expenses increased during 2023 as compared to 2022, we expect that they will not increase over the next twelve months.

Facilities and equipment expenses increased during the nine months ended September 30, 2023 as a result of increased rent and associated costs related to a new facility we took possession of in April 2022. Facilities and equipment expenses are not expected to increase during the next twelve months.

General and Administrative Expenses

General and administrative expenses primarily consist of salaries and related benefits for our executive, administrative, legal and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses. The Company does not expect that general and administrative expenses will increase on a yearly basis from the current quarter September 30, 2023 expense trend.

General and administrative expenses were $13.4 million and $40.4 million for the three and nine months ended September 30, 2023, respectively, compared with $12.5 million and $34.2 million in the comparable periods last year. These increases in expenses resulted primarily from increased personnel expenses due to increased headcount and salaries, increased travel and consulting expenses as well as increased rent expense associated with the new facility. The Company does not expect that general and administrative expenses will increase on a yearly basis from the current quarter September 30, 2023 expense trend.

Finance income (expense), net

(in thousands)

* Greater than 100%

Interest income is generated on cash and cash equivalents. The increase in interest income for the three and nine month periods ended September 30, 2023 as compared to the comparable periods last year was primarily the result of increased interest rates and an increased cash balance due to large cash amounts received under the CSL Seqirus agreement. Interest expense decreased as no interest expense was incurred during the second and third quarters of 2023 related to the extinguishment of the Western Alliance Agreement and the forgiveness of the Singapore Loan during the first quarter of 2023.

Other income and expense

(in thousands)

* Greater than 100%

Other income and expense items primarily relate to gains and losses from equity-method investments and foreign currency transactions. Additionally, we recorded a gain on debt extinguishment related to the Singapore Loan of $34.0 million during the first quarter of 2023 as a result of the Singapore Loan being forgiven.

We recorded no gain or loss in the three and nine months ended September 30, 2023, compared with no gain or loss in the three months ended September 30, 2023 and $0.5 million losses in the nine months ended September 30, 2022 in connection with our investment in GRI Bio, Inc. (formerly Vallon Pharmaceuticals, Inc.)

The changes in gain (loss) from foreign currency for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 were primarily attributable to the Singapore Loan being forgiven during the first quarter of 2023. The remaining amounts recorded as gain (loss) from foreign currency relate to transactions made in foreign currencies.

Off-balance sheet arrangements

Through September 30, 2023, we have not entered into and did not have any relationships with unconsolidated entities or financial collaborations, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Liquidity and Capital Resources

From the Company’s inception through the quarter ended September 30, 2023, the Company has funded its operations principally with the proceeds from the sale of capital stock, long-term debt and revenues earned through collaboration agreements and government contracts. We received a $200.0 million upfront payment from CSL Seqirus during the fourth quarter of 2022. Additionally, in the three months ended June 30, 2023, we received $90.0 million in milestone payments and $23.6 million for the manufacturing and supply of ARCT-154 from CSL Seqirus. We expect to receive future payments from CSL Seqirus primarily by meeting future milestones related to the CSL Collaboration Agreement. At September 30, 2023, we had $311.9 million in unrestricted cash and cash equivalents which includes amounts borrowed of $20.0 million from the Wells Fargo Credit Agreement. Balances outstanding under the line of credit will vary from quarter to quarter as cash flow from collaborations fluctuate.

CSL Seqirus, Inc. Collaboration and License Agreement

We entered into the CSL Collaboration Agreement with CSL Seqirus, a part of CSL Limited, one of the world’s leading influenza vaccine providers, for the global exclusive rights to research, develop, manufacture and commercialize mRNA vaccines.

CSL Seqirus received exclusive global rights to our technology for vaccines against SARS-CoV-2 (COVID-19), influenza and three other respiratory infectious diseases with non-exclusive rights to pandemic pathogens. We received an up-front payment of $200.0 million during the fourth quarter of 2022. We will be eligible to receive development milestones totaling more than $1.3 billion if all products are registered in the licensed fields. We will also be entitled to receive up to $3.0 billion in commercial milestones based on “net sales” of vaccines in the various fields.

In addition, we are entitled to receive a 40% share of net profits from COVID-19 vaccine sales and up to low double-digit royalties of annual net sales for vaccines against influenza and the other three specified infectious disease pathogens, as well as royalties on revenues from vaccines that may be developed for pandemic preparedness.

The CSL Collaboration Agreement sets forth how CSL Seqirus and us shall collaborate to research and develop vaccine candidates. In the COVID-19 field, we will lead activities for certain regulatory filings for ARCT-154 in the US and Europe and for research and development activities of a next-generation COVID vaccine candidate. CSL Seqirus will lead and be responsible for all other research and development in COVID-19, influenza and the other fields.

Wells Fargo Credit Agreement

On April 21, 2023, the Company’s wholly-owned subsidiary, Arcturus Therapeutics, Inc. entered into a credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”) whereby Wells Fargo agreed to make a $50.0 million revolving credit line available to the Company (the “Wells Fargo Loan”) and each Wells Fargo Loan evidenced by a revolving line of credit note (the “Note”).

Borrowings under the agreement will bear interest at a rate of 1.00% above either the Daily Simple SOFR or Term SOFR (as such terms are defined in the Wells Fargo Note), with “SOFR” being the rate per annum equal to the secured overnight financing rate as administered by the Federal Reserve Bank of New York. If an Event of Default (as defined in the credit agreement) occurs, then all Wells Fargo Loans shall bear interest at a rate equal to 2.00% above the interest rate applicable immediately prior to the occurrence of the Event of Default.

The term of the agreement is two years, with an option for one-year renewals subject to Wells Fargo approval and the Company furnishing to Wells Fargo a non-refundable commitment fee equal to 0.25% of the Wells Fargo Loan amount for each such renewal. There is no penalty for terminating the agreement. There is no penalty for terminating the facility prior to the maturity date of the Wells Fargo Note. As collateral, the Company has agreed to pledge $55.0 million in cash to be held at the Company’s securities accounts with Wells Fargo Securities, LLC, an affiliate of Wells Fargo, pursuant to a security agreement. During the three months ended September 30, 2023, we drew down $20.0 million which was subsequently repaid in October 2023.

Grant from the Biomedical Advanced Research and Development Authority

On August 31, 2022, we entered into a cost reimbursement contract (the “BARDA Contract”) with the Biomedical Advanced Research and Development Authority (“BARDA”), a division of the Office of the Assistant Secretary for Preparedness and Response (ASPR) within the U.S. Department of Health and Human Services (HHS) to support the development of a low-dose pandemic influenza candidate based on our proprietary self-amplifying messenger RNA-based vaccine platform. The BARDA Contract is to support our non-clinical and pre-clinical development, early-stage clinical development through Phase 1, and associated drug product manufacturing, regulatory and quality-assurance activities over a period of three years. It provides for reimbursement by BARDA of our permitted costs up to $63.2 million.

Vinbiocare Agreement

During 2021, we entered into a technology license and technical support agreement and the framework drug substance supply agreement with Vinbiocare, a member of Vingroup Joint Stock Company (collectively, the “Vinbiocare License & Supply Agreements”), whereby we would provide technical expertise and support services to Vinbiocare to assist in the build out of an mRNA drug product manufacturing facility in Vietnam. We received an upfront payment in aggregate of $40.0 million as part of the Vinbiocare License and Supply Agreements. In October 2022, in association with the termination of the Vinbiocare License and Supply Agreements, we signed the Vinbiocare Support Agreement with Vinbiocare which continues Vinbiocare’s clinical obligations and reserved a portion of the original $40.0 million upfront payment received from the License and Supply Agreements to be paid over the future periods.

The Vinbiocare Support Agreement requires us to pay to Vinbiocare certain limited payments, including upon the occurrence of specified events through the first quarter of 2025. Vinbiocare is also eligible to receive a single digit percentage of amounts received by Arcturus on net sales, if any, of ARCT-154 (or next-generation COVID vaccine) up to a capped amount.

General Financial Resources

A portion of our current cash balance is expected to be utilized during fiscal year 2023 to fund (i) the continued Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (ii) advances to our LUNAR-CF program in clinical trials, (iii) expenses incurred prior to customer payments under the CSL Collaboration Agreement and BARDA agreement and (iv) continued exploratory activities related to our platform and other general administrative activities.

Our future capital requirements are difficult to forecast and will depend on many factors that are out of our control. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. There can be no assurance that we will be able to obtain additional needed financing on acceptable terms or at all. Additionally, equity or debt financings may have a dilutive effect on the holdings of our existing shareholders.

We expect to continue to incur additional losses in the long term, and we will need to execute on milestones within the CSL Collaboration Agreement, raise additional debt or equity financing or enter into additional partnerships to fund development. Our ability to transition to profitability is dependent on executing on milestones within the CSL Collaboration Agreement and identifying and developing successful mRNA drug and vaccine candidates. If we are not able to achieve planned milestones or incur costs in excess of our forecasts, we will need to reduce discretionary spending, discontinue the development of some or all of our programs, which will delay part of our development programs, all of which will have a material adverse effect on our ability to achieve our intended business objectives.

Funding Requirements

We anticipate that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin commercialization of our products. As a result, we will require additional capital to fund our operations in order to support our long-term plans. We believe that our current cash position will be sufficient to meet our anticipated cash requirements through at least the next twelve months, assuming, among other things, no significant unforeseen expenses and continued funding from partners at anticipated levels. We intend to seek additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners or through other sources of financing. Should we seek additional financing from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or discontinue the advancement of product candidates, reduce headcount, liquidate our assets, file for bankruptcy, reorganize, merge with another entity, or cease operations.

Our future funding requirements are difficult to forecast and will depend on many factors, including the following:

• the development of our LUNAR-COV19 and LUNAR-FLU vaccine candidates;
• the achievement of milestones under our strategic alliance agreements;
• maintaining and/or expanding our manufacturing network and capabilities;
• the terms and timing of any other strategic alliance, licensing and other arrangements that we may establish, including those with CSL Seqirus and CSL Seqirus’ arrangement with Meiji, and any related payments thereunder;
• the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates;
• the number and characteristics of product candidates that we pursue;
• the outcome, timing and cost of regulatory approvals;
• delays that may be caused by changing regulatory requirements;
• the cost and timing of hiring new employees to support our continued growth;
• the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;
• the costs and timing of procuring clinical and commercial supplies of our product candidates;
• the costs and timing of establishing sales, marketing and distribution capabilities;
• the costs associated with legal proceedings;
• the costs associated with potential litigation related to collaboration agreements; and
• the extent to which we acquire or invest in businesses, products or technologies.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements in conformity with GAAP. As such, we make certain estimates, judgments and assumptions that we believe are reasonable, based upon information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our reported results of operations and financial condition. We describe our significant accounting policies more fully in Note 2 to our consolidated financial statements for the year ended December 31, 2022.

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the 2022 Annual Report.

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates in the United States. Due to the nature of our cash and cash equivalents, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) of the Exchange Act, our management, including our principal executive officer, our principal financial officer and our principal accounting officer, conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management has concluded that as of September 30, 2023, the Company’s disclosure controls and procedures were effective at the reasonable assurance level, and we believe the condensed consolidated financial statements included in this Form 10-Q for the quarterly periods ended September 30, 2023 fairly present, in all material respects, our financial position, results of operations, comprehensive loss, statements of stockholders’ equity and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act, our management, including our principal executive officer, our principal financial officer and our principal accounting officer, conducted an evaluation of the internal control over financial reporting to determine whether any other changes occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our principal executive officer, principal financial officer and principal accounting officer concluded that there were no changes in our internal controls over financial reporting during the periods covered by this Quarterly Report on Form 10-Q that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Our business is subject to various risks, including those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which we strongly encourage you to review. Other than as set forth below, there have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Commission on March 29, 2023 and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 filed with the Commission on August 7, 2023.

Evolving dynamics in the market for COVID-19 vaccines are likely to impact our financial results.

With the global transition of COVID-19 from pandemic to endemic, the commercial market for COVID-19 vaccines is facing several challenges, including a more fragmented customer base, less predictability in orders, greater seasonality of demand, increased distribution costs, and higher costs of goods sold due to single-dose or lower-dose presentations. Such factors could impact the potential market for our COVID-19 vaccine (under our collaboration with CSL Seqirus), if approved. Further, our continued development efforts for our COVID-19 vaccine could face increased research and development costs, including for clinical trials, when updating COVID-19 vaccines for new variants of concern.