Arcturus Therapeutics Holdings Inc. (ARCT) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis together with the consolidated financial statements and related notes included elsewhere herein.

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.

Overview

We are a global messenger RNA medicines company focused on the development of infectious disease vaccines and therapeutics for 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.

In June 2020, we initiated our first clinical study, a Phase 1 study for our mRNA-based therapeutic candidate for ornithine transcarbamylase (“OTC”) deficiency. We launched our COVID-19 vaccine program in March 2020, and in November 2023, our self-amplifying mRNA vaccine against COVID-19, ARCT-154, received marketing approval in Japan. 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 the 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 (“CSL Collaboration”) combines CSL Seqirus’ established global vaccine commercial and manufacturing infrastructure with Arcturus’ manufacturing expertise and innovative STARR self-amplifying mRNA and LUNAR delivery platform technologies.

Our vaccines franchise, led by our self-amplifying mRNA-based COVID-19 program, made significant strides in 2023, highlighted by the marketing authorization approval in Japan of ARCT-154. The approval is the world’s first for a self-amplifying RNA (sa-mRNA) COVID-19 Vaccine. In August 2023, we successfully completed the 12-month safety follow-up of the pivotal Phase 1/2/3 study in Vietnam of ARCT-154 that completed dosing in April 2022 of over 19,000 participants. In February 2023, Meiji Seika Pharma Co., Ltd. (“Meiji”), a Japanese leader in the area of infectious disease, completed dosing of a Phase 3 clinical trial of ARCT-154 in Japan to evaluate the safety and immunogenicity of a booster dose of ARCT-154, and to assess the non-inferiority of ARCT-154 to a licensed mRNA vaccine, administered as a booster. Meiji conducted the study under its exclusive partnership with CSL Seqirus for distribution of ARCT-154 in Japan. The study enrolled 828 adult participants, with half in the ARCT-154 group and half in a comparator group (Comirnaty®, Pfizer-BioNTech). The results of this study demonstrated that a booster dose of ARCT-154 elicited a numerically higher immune response (meeting the non-inferiority criteria) against the original Wuhan-Hu-1 virus strain and a superior immune response against Omicron BA.4/5 subvariant of SARS-CoV-2 virus compared to a booster dose of the conventional mRNA vaccine Comirnaty®. These Phase 3 study results were used to support the approval of ARCT-154 in Japan for primary immunization and as a booster dose.

Our activities since inception have consisted principally of performing research and development activities, clinical research activities, general and administrative activities and raising capital to fund those efforts. Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before we

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achieve sustainable revenues and profit from operations. As of December 31, 2023, we had an accumulated deficit of $367.9 million.

Liquidity and Capital Resources

From the Company’s inception through the year ended December 31, 2023, the Company has funded its operations principally with the proceeds from revenues earned through collaboration agreements and government contracts, the sale of capital stock and long-term debt. During fiscal year 2023, we received milestone payments totaling $147.9 million from CSL Seqirus. Additionally, we received milestone payments of $23.8 million from CSL Seqirus subsequent to December 31, 2023. We expect to receive future payments from CSL Seqirus primarily by meeting future milestones related to the CSL Collaboration Agreement. At December 31, 2023, the Company’s balance of cash and cash equivalents, including restricted cash, was $348.9 million.

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 we 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”) with each Wells Fargo Loan evidenced by a revolving line of credit note (each, a “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.

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

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(“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 2024 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 when and as needed. 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.

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Our future funding requirements are difficult to forecast and will depend on many factors, including but not limited to 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.

The following table shows a summary of our cash flows for the years ended December 31, 2023 and 2022:

Operating Activities

Net cash used in operating activities in 2023 was $18.1 million and consisted of net loss of $29.7 million offset by adjustments of $4.2 million and a net change in assets and liabilities of $7.4 million. Non-cash items primarily included stock-based compensation of $34.6 million and depreciation and amortization of $3.0 million offset by a gain on debt extinguishment of $34.0 million. The net change in assets and liabilities was primarily due to an increase in deferred revenue of $38.6 million, a decrease in right-of-use assets of $4.0 million and a decrease in prepaid and other current assets of $1.2 million. This was partially offset by an increase in accounts receivable of $29.3 million, a decrease in accounts payable and accrued liabilities of $2.9 million and a decrease lease liabilities of $4.3 million.

Net cash provided by operating activities in 2022 was $32.0 million and consisted of net income of $9.3 million and non-cash adjustments of $35.2 million, plus a net change in assets and liabilities of $12.6 million. Non-cash items primarily included stock-based compensation of $30.6 million and depreciation and amortization of $1.5 million. The net change in assets and liabilities was primarily due to a decrease in deferred revenue of $14.7 million, a decrease in lease liabilities of $4.5 million, and increase in prepaid and other current assets of $3.6 million and a decrease in accounts payable of $3.1 million, partially offset by an increase in accrued liabilities of $9.4 million, a decrease in right-of-use assets of $3.3 million and a decrease in accounts receivable of $0.6 million.

Investing Activities

Net cash used in investing activities of $2.9 million in 2023 and $7.7 million in 2022 reflected the acquisition of property and equipment.

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Financing Activities

Net cash used in financing activities in 2023 was $24.1 million, primarily from principal payments on long-term debt of $27.4 million, partially offset by proceeds from the exercise of stock options of $2.7 million and proceeds from the issuance of common stock related to our employee stock purchase plan of $0.6 million.

Net cash used in financing activities in 2022 was $2.9 million, primarily from principal payments on long-term debt of $5.0 million, partially offset by proceeds from the exercise of stock options of $1.7 million and proceeds from the issuance of common stock related to our employee stock purchase plan of $0.4 million.

Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements included in this Annual Report. 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.

Revenues

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 and royalties on future sales. The following table summarizes our total revenues for the periods indicated:

Revenue decreased by $39.2 million during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The decrease during 2023 primarily relates to decreases in revenue of the following: (i) $25.2 million related to the termination of the agreement with Vinbiocare during 2022, (ii) $12.5 million related to the recognition of revenue for agreement with the Israeli Ministry of Health during 2022, (iii) $8.5 million related to the termination of the agreement with Janssen during 2022 and (iv) $1.9 million related to the completion of the amortization of the upfront payment from the UGX agreement during the second quarter of 2023. The decrease was primarily offset by increases in the revenue of $8.8 million related to the increase in reimbursable research and development expenses for the grant agreement with BARDA and $0.1 million related to other material transfer agreements during the year ended 2023.

Operating Expenses

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

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

Research and Development Expenses, net

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 $192.1 million for the year ended December 31, 2023, compared with $147.8 million in the comparable period last year, primarily reflecting increased manufacturing costs of $27.4 million, an increase of $6.7 million in personnel related costs, an increase in consulting expenses of $3.7 million, an increase of $3.2 million in facilities expense and an increase of contra research and development expenses recognized of $8.4 million. The increase was primarily offset by a decrease of clinical-related expenses of $5.0 million. We expect that our research and development efforts and associated costs will 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 year ended December 31, 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 significantly during the next twelve months.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits for our executive, administrative and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses.

General and administrative expenses were $52.9 million and $46.1 million for the year ended December 31, 2023 and 2022, respectively. 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

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associated with the new facility. We expect that general and administrative expenses will remain consistent during the next twelve months.

Finance income (expense), net

Interest income is generated on cash and cash equivalents. The increase in interest income from 2022 to 2023 was the result of higher interest rates during the year ended 2023 and an increase in cash due to large amounts received under the CSL Seqirus agreement during the fourth quarter of 2022.

Interest expense decreased during the year ended 2023 as compared to the year ended 2022 as no interest expense was incurred subsequent to the first quarter of 2023. This was a result of the extinguishment of the Western Alliance loan and forgiveness of the Singapore Loan.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. 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 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, 2023. In the following paragraphs, we describe the specific risks associated with these critical accounting policies and we caution that future events may not reflect exactly as one may expect, and that best estimates may require adjustment.

The following are our significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results.

Revenue Recognition

Research and development revenue under collaborative agreements

We recognize research and development revenue from several collaboration agreements. Our collaboration agreements typically contain promised goods and services, including technology licenses or options to obtain technology licenses, research and development and regulatory services. Upon entering into a collaboration agreement, we are required to make the following judgments:

Identifying the performance obligations contained in the agreement

Our assessment of what constitutes a separate performance obligation requires us to apply judgment. Specifically, we are required to identify which goods and services we are required to provide under the contract are distinct, if any.

Determining the transaction price, including any variable consideration

To determine the transaction price, we review the amount of consideration we are eligible to earn under the agreement. We do not typically include any payments we may receive in the future in our initial transaction price since the payments are typically not probable because they are contingent upon certain future events.

We are required to reassess the total transaction price at each reporting period to determine if we should include additional payments that have become probable in the transaction price.

Allocating the transaction price to each of our performance obligations

When we allocate the transaction price to more than one performance obligation, we make estimates of the relative stand-alone selling price of each performance obligation because we do not typically sell our goods or

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services on a stand-alone basis. The estimate of the relative stand-alone selling price requires us in some cases to make significant judgments. In cases where we deliver a license at the start of an agreement, we use valuation methodologies, such as costs to recreate plus margin, to value the license. Additionally, when we estimate the selling price for research and development and regulatory services, we make estimates, including: the number of internal hours we will spend on the services, the cost of work we and third parties will perform and the cost of clinical trial material we will use.

The research and development revenue we recognize each period is comprised of several types of revenue, including license fees, amortization from upfront payments, milestone payments, option exclusivity fees and other services. Each of these types of revenue require us to make various judgments and estimates.

Amortization from Upfront Payments

For certain agreements, we recognize revenue from the amortization of upfront payments as we perform research and development, technology transfer and consulting services. We use an input method to estimate the amount of revenue to recognize each period. This method requires us to make estimates of the total costs we expect to incur in order to complete our promised research and development services or the total length of time it will take us to complete our promised research and development services. If we change our estimates, we may have to adjust our revenue.

Milestone Payments

When recognizing revenue related to milestone payments, we typically judge and estimate whether the milestone payment is probable (discussed in detail above under “Determining the transaction price, including any variable consideration”).

License Fees

In some cases, we deliver a license upon execution of an agreement. If we determine that our partner has full use of the license and we do not have any additional material performance obligations related to the license after delivery, then we consider the license to be a separate performance obligation. We generally recognize as license revenue the total amount of the transaction price we determine to be the allocated to the performance obligation based upon the relative stand-alone selling price of a license when we deliver the license to our partner. We discuss the estimates we make related to the relative stand-alone selling price of a license in detail above under “Allocating the transaction price to our performance obligations.”

Research and Development Expenses, Including Clinical Trial Accruals/Expenses

Research and development costs consist of salaries and benefits, including related stock-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf, such as clinical research organizations, or CROs, and contract manufacturing organizations, or CDMOs. Research and development costs are expensed as incurred.

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Clinical trial expenses are a significant component of research and development expenses, and we outsource a significant portion of these clinical trial activities to third parties. Third-party clinical trial expenses include investigator fees, site and patient costs, CRO costs, and costs for central laboratory testing and data management. The accrual for site and patient costs includes inputs such as estimates of patient enrollment, patient cycles incurred, clinical site activations, and other pass-through costs. These inputs are required to be estimated due to a lag in receiving the actual clinical information from third parties. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the balance sheets as prepaid assets or accrued expenses. These third-party agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for goods or services that will be used or rendered for future research and development activities are recorded as a prepaid asset and recognized as expense as the related goods are delivered or the related services are performed. When evaluating the adequacy of the accrued expenses, we analyze progress of the studies, including the phase or completion of events, invoices received and contracted costs. We make estimates of our accrued balances as of each balance sheet date based on facts and circumstances known to our internal personnel at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made. Our historical clinical trial accrual estimates have not been materially different from our actual costs.