Arcturus Therapeutics Holdings Inc. (ARCT)

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.

Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Form 10-K can be found within Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2023.

Overview

We are a messenger RNA medicines company focused on the development of infectious disease vaccines and opportunities within liver and respiratory rare diseases. We developed the world’s first approved self-amplifying messenger RNA (sa-mRNA) vaccine, KOSTAIVE® (“KOSTAIVE”). KOSTAIVE achieved approval in Japan in 2023 as a vaccine against COVID-19. Sales of KOSTAIVE began in Japan in October 2024, marking our transition to a commercial stage company.

We have several key platform technologies that we leverage to develop and advance a pipeline of mRNA-based vaccines and therapeutics for infectious diseases and for rare genetic disorders with significant unmet medical needs. Current mRNA medicines have two critical components: the messenger RNA (“mRNA”) constructs and the lipid nanoparticles (“LNP”) which help deliver the mRNA to disease-relevant target tissues. We believe we are among the world leaders in both areas. We have extensive expertise in the design and optimization of mRNA constructs, including with respect to a type of mRNA technology known as self-amplifying mRNA (sa-mRNA). Our proprietary self-amplifying mRNA technology platform, or STARR® (“STARR”), has been demonstrated to induce a longer-lasting and broader humoral immune response at lower dose levels than conventional mRNA-based vaccines. Our proprietary LNP delivery system, LUNAR® (“LUNAR”), is intended to address the major hurdle in RNA drug development, namely the effective and safe delivery of RNA therapeutics to disease-relevant target tissues. LUNAR may enable multiple nucleic acid medicines. The approval of KOSTAIVE in Japan was a significant milestone which validates our LUNAR and STARR platforms, as well as sa-mRNA more generally as a meaningful modality. Finally, we have significant expertise and valuable know-how in the development and scalability of complex and robust manufacturing processes required to deliver the next generation of nucleic acid medicines.

Our internal pipeline includes RNA therapeutic candidates to potentially treat ornithine transcarbamylase (OTC) deficiency and cystic fibrosis (CF), both rare diseases. In our vaccine program, we have partnered with Seqirus, Inc. (“CSL Seqirus”), a part of CSL Limited and one of the world’s leading influenza vaccine providers, on the development and commercialization of mRNA vaccines for COVID-19, influenza and certain other infectious diseases.

We made significant progress in 2024. Commercial sales of KOSTAIVE began in October 2024 in Japan by Meiji Seika Pharma (“Meiji”), CSL Seqirus’ exclusive partner in Japan, marking the first commercial sales of an Arcturus-developed product. In February 2025, we received approval of KOSTAIVE from the European Commission (EC), which provided further validation of our platform by another significant regulatory authority.

KOSTAIVE is the brand name approved in Japan and Europe for ARCT-154, which is the version of the sa-mRNA COVID vaccine encoding the ancestral strain of SARS-CoV-2, and also for updated variant-specific versions of this vaccine. We may use KOSTAIVE or the specific internally generated name, such as ARCT-154, ARCT-2301 and ARCT-2303, to identify a version of the vaccine.

We initiated dosing in a Phase 1 clinical trial of a novel seasonal influenza sa-mRNA vaccine candidate under our collaboration with CSL Seqirus in January 2024. In December 2024, we initiated dosing of an sa-mRNA vaccine candidate against pandemic avian influenza (bird flu) in a Phase 1 trial funded by the Biomedical Advanced Research and Development Authority (“BARDA”).

In our OTC program, we completed dosing of eight subjects in August 2024 in a Phase 2 double-blind multiple-dose study of ARCT-810. In the second quarter of 2024, we expanded the Phase 2 clinical program of ARCT-810 with an open-label, multiple-dose study which initiated dosing in December 2024. ARCT-810 has

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received Orphan Drug Designation from the FDA and Orphan Medicinal Product Designation from the European Medicines Agency (the “EMA”) for treatment of OTC deficiency, as well as Fast Track Designation and Rare Pediatric Disease Designation from the FDA.

In our CF program, we initiated dosing in December 2024 in a Phase 2 multiple ascending dose study of ARCT-032 designed to identify a safe and effective dose in people with Class I (null) CFTR mutations and other CF patients who do not benefit from CFTR modulators. In July 2024, we completed dosing and follow-up visits for seven participants in a safety and tolerability Phase 1b clinical study in New Zealand of ARCT-032 in adults with CF. ARCT-032 has received Orphan Drug Designation by the FDA and Orphan Medicinal Product Designation by the EMA for the treatment of CF, and Rare Pediatric Disease Designation from the FDA.

We also improved our platform technologies and advanced our early-stage research activities and manufacturing process development and operations. We conducted 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. Also, with our sourcing partners, we manufactured cGMP (current good manufacturing practices) batches yielding significant quantities of clinical trial materials for global studies of our candidates, and with our collaborator, CSL Seqirus, we have established commercial production processes for the COVID-19 vaccine program.

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 achieve sustainable revenues and profit from operations. As of December 31, 2024, we had an accumulated deficit of $448.8 million.

Liquidity and Capital Resources

From the Company’s inception through the year ended December 31, 2024, 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 2024, we received milestone payments totaling $96.0 million from CSL Seqirus. We expect to receive future payments from CSL Seqirus primarily by meeting future milestones related to the CSL Collaboration Agreement. At December 31, 2024, the Company’s balance of cash and cash equivalents, including restricted cash, was $293.9 million.

CSL Seqirus, Inc. Collaboration and License Agreement

In 2022, 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 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 (as amended, the “Wells Fargo Loan”) with each Wells Fargo Loan evidenced by a revolving line of credit note (each, a “Note”). On June 26, 2024, the parties entered into

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Amendment No. 1 to the Wells Fargo Loan, whereby the term was extended by one year to April 2026. As of December 31, 2024, no borrowings were made against the Wells Fargo Loan.

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 Loan), 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 original 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 Loan. 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 (“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. As of December 31, 2024, the remaining available funding net of revenue earned was $40.0 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 2025 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.

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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 regulatory approvals and subsequent sales of KOSTAIVE, executing on milestones within the CSL Collaboration Agreement and identifying and developing other 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.

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

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the development of our LUNAR-COV19 and LUNAR-FLU vaccine candidates;

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the achievement of milestones under our strategic alliance agreements;

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maintaining and/or expanding our manufacturing network and capabilities;

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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;

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the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates;

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the number and characteristics of product candidates that we pursue;

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the outcome, timing and cost of regulatory approvals;

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delays that may be caused by changing regulatory requirements;

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the cost and timing of hiring new employees to support our continued growth;

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the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;

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the costs and timing of procuring clinical and commercial supplies of our product candidates;

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the costs and timing of establishing sales, marketing and distribution capabilities;

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the costs associated with legal proceedings;

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the costs associated with potential litigation related to collaboration agreements; and

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the extent to which we acquire or invest in businesses, products or technologies.

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The following table shows a summary of our cash flows for the years ended December 31, 2024 and 2023:

Operating Activities

Net cash used in operating activities was $59.7 million for the year ended December 31, 2024, compared to $18.1 million for the year ended December 31, 2023. The $41.6 million increase in cash used was primarily driven by a $93.8 million year-over-year impact from deferred revenue, as 2023 benefited from a $38.6 million deferred revenue inflow, while 2024 saw a $55.2 million outflow due to revenue recognition exceeding new milestone payments under the CSL collaboration agreement. Additionally, the increase in cash outflows was due to a higher net loss and the absence of a $34.0 million debt extinguishment gain recognized in 2023. These impacts were partially offset by a $57.4 million improvement in accounts receivable, as payments from CSL and BARDA were received in 2024 and a $6.5 million increase in accrued liabilities, primarily due to the timing of bonus accruals.

Investing Activities

Net cash used in investing activities of $0.6 million in 2024 and $2.9 million in 2023 reflected the acquisition of property and equipment.

Financing Activities

Net cash provided by financing activities was $5.4 million for the year ended December 31, 2024, compared to a net cash outflow of $24.1 million in 2023 ,representing a $29.5 million increase. The primary drivers of this increase were the repayments of the Singapore Loan and the Loan and Security Agreement with Western Alliance Bank during 2023, with no similar debt repayments occurring in 2024.

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 $14.5 million during the year ended December 31, 2024 as compared to the year ended December 31, 2023. The decrease during 2024 primarily relates to a $15.9 million decrease in revenue related to the CSL collaboration agreement, primarily due to an $82.0 million decrease in milestone achievements during 2024 as compared to 2023, offset by a $23.4 million increase in revenue related to CSL commercial supply agreements and increased revenue recognition from amortization due to the progress of the CSL development programs during 2024. The remaining decrease is primarily due to a decrease of $1.8 million related to the completion of the amortization of the upfront payment during 2023 from the 2015 Research Collaboration and License Agreement with Ultragenyx

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Pharmaceuticals, Inc., as well as $0.7 million less revenue in 2024 due the termination of the 2017 Research Collaboration and License Agreement with Janssen Pharmaceuticals, Inc. The decrease was primarily offset by an increase in the revenue of $4.8 million related to the increase in reimbursable research and development expenses for the grant agreement with BARDA.

Operating Expenses

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

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 $195.2 million for the year ended December 31, 2024, compared with $192.1 million for the year ended December 31, 2023, primarily reflecting increased payroll and benefits costs due to share-based compensation expense, progress within our BARDA, LUNAR-CF, and LUNAR-FLU programs, and clinical trial costs for the LUNAR-COVID program. The overall increase was offset by decreased manufacturing-related expenses due to lower costs associated with drug product supply agreements related to the LUNAR-COVID program during the year ended December 31, 2024. 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, and primarily includes the LUNAR-FLU program which is partnered with CSL Seqirus. Discovery technologies represent our efforts to expand our product pipeline and are primarily related to pre-partnered studies and new capabilities assessment. A few of our programs are part of our collaborative relationships. The related expenses may be partially offset with funds that have been reimbursed or awarded to the Company and consist of external manufacturing costs, lab supplies, equipment, and consulting and professional fees. Expenses for both early-stage programs and discovery technologies are expected to decrease as we shift our focus to later-stage programs.

Payroll and benefits primarily consists of employee salaries and benefits, share-based compensation and consultant costs. Although such expenses increased during 2024 as compared to 2023, we expect that they will not increase over the next twelve months due to reduced share-based compensation.

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Facilities and equipment expenses include rent, common area maintenance (“CAM”) costs, depreciation, shipping costs and various other costs related to the operation of our two office and laboratory locations. These costs decreased during 2024 as compared to 2023 as we downsized from three to two facilities. Facilities and equipment expenses are not expected to increase 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 $52.8 million and $52.9 million for the years ended December 31, 2024 and 2023, respectively. We expect that general and administrative expenses will decrease slightly during the next twelve months due to reduced share-based compensation from fully vested stock options.

Finance income (expense), net

Interest income is generated on cash and cash equivalents. The decrease in interest income from 2023 to 2024 was the result of lower interest rates during the year ended 2024 and a decrease in cash and cash equivalents.

Interest expense decreased during the year ended 2024 as compared to the year ended 2023 as no interest expense has been incurred since to the first quarter of 2023. This was a result of the extinguishment of the Loan and Security Agreement dated October 12, 2018 with Western Alliance Bank, and forgiveness of the term loan from Economic Development Board of the Republic of Singapore pursuant to the Manufacturing Support Agreement dated November 7, 2020.

Critical Accounting Policies and Estimates

Our significant accounting policies are summarized in “Note 2 Summary of Significant Accounting Policies,” included in our consolidated financial statements included elsewhere in this annual report on Form 10-K.

The preparation of our consolidated financial statements in conformity with “GAAP” requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, assumptions related to revenue recognition, accrual of research and development expenses, determination of incremental borrowing rates, and the valuations of stock options. We based our estimates on historical experience, known trends and other market-specific or other relevant factors that we believe to be reasonable under the circumstances. On an ongoing basis, management evaluates these estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Revenue Recognition

We recognize revenue when control of the products and services is transferred to our customers in an amount that reflects the consideration we expect to receive from our customers in exchange for those products and services. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied.

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:

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Identifying the performance obligations and measuring progress

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. For performance obligations that are satisfied over time, we typically use the percentage-of-completion method which requires us to estimate the total forecasted costs required to complete the performance obligation. Adjustments to these estimates could materially impact the timing and amount of recognized revenue. If actual costs exceed initial estimates, revenue recognized to date may need to be adjusted downward, negatively impacting current period results. Conversely, favorable cost variances could accelerate revenue recognition.

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 apply a constraint to any payments we may receive in the future to avoid significant reversals 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 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 revenue we recognize each period is comprised of several types of revenue, including license fees, amortization from upfront payments, milestone payments, research and development 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 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.”

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Research and Development Expenses, Including Clinical Trial Accruals/Expenses

Research and development costs consist of salaries and benefits, including share-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.

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.

Leases

We cannot readily determine the interest rate implicit in the lease, therefore, we use our incremental borrowing rate to measure lease liabilities. The incremental borrowing rate is the rate of interest that we would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use, or ROU, asset in a similar economic environment. The incremental borrowing rate therefore reflects what we ‘would have to pay’, which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. We estimate the incremental borrowing rate using observable inputs (such as market interest rates) when available and are required to make certain entity and asset-specific estimates. The incremental borrowing rate used in the calculation of the present value of lease payments in calculating lease liabilities and the corresponding ROU requires the use of significant judgment by management.

Share-Based Compensation

We recognize compensation expense related to stock options granted to employees and nonemployees based on the estimated grant date fair value and recognize forfeitures as they occur. We estimate the grant date fair value, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model for service-based and performance-based awards. The grant date fair value of the share-based awards is recognized on a straight-line basis over the requisite service period, which is typically the vesting period of the respective awards. The Black-Scholes option-pricing model requires the use of highly subjective assumptions to determine the fair value of share-based awards. Such assumptions involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our share-based compensation could be materially different.

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.

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 late-stage clinical messenger RNA medicines and vaccine company focused on the development of infectious disease vaccines and significant 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.

Our vaccines franchise, led by our self-amplifying mRNA based COVID-19 program, made significant strides in 2022. In April 2022, the Phase 1/2/3 study in Vietnam of ARCT-154, our lead self-amplifying mRNA vaccine candidate, completed dosing of over 19,000 participants and we announced that ARCT-154 met its primary efficacy endpoint in the study. 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 with 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 are evaluating in preclinical studies the efficacy and safety of a seasonal influenza vaccine (our LUNAR-FLU mRNA vaccine candidate). Pursuant to a third-party study agreement executed in December 2022 with Meiji Seika Pharma 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 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.

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 achieve sustainable revenues and profit from operations. As of December 31, 2022, we had an accumulated deficit of $338.1 million.

Liquidity and Capital Resources

Overview

Since our inception, we have funded our operations principally with proceeds from the sale of capital stock and debt obtained through a term loan as well as revenues earned through collaborative agreements and government contracts. Additionally, during the fourth quarter of 2022, we received a $200.0 million upfront payment from CSL

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Seqirus and expect to receive future payments primarily from meeting future milestones related to the arrangement. At December 31, 2022, we had $391.9 million in unrestricted cash and cash equivalents.

Pursuant to the Third Amendment to the Western Loan Agreement (as amended, the “Western Alliance Agreement”), Western Alliance Bank (“Western Alliance”) agreed to make a term loan to us on October 30, 2019, in the amount of $15.0 million (the “Term Loan”). The Term Loan bears interest at a floating rate ranging from 1.25% to 2.75% above the prime rate. The amendment further provides that the Term Loan has a maturity date of October 30, 2023. In October of 2021, we entered into a Fifth Amendment to the Western Loan Agreement, which provided for a six month extension to the interest only period which moves the first principal payment to May 1, 2022. On March 14, 2023, the Western Alliance Agreement was terminated (the “Termination”) upon the receipt by Western Alliance of a payoff amount of approximately $7.36 million from us. The payoff amount was made by Arcturus to Western Alliance from available cash on hand, pursuant to a payoff letter, and included payment of (i) approximately $7.02 million in principal and interest, (ii) $300,000 fee payable upon prepayment as a result of prior FDA approval of an IND, (iii) $35,000 in prepayment charges and (iv) de minimis amounts for various operational fees. We were released from all liens under the Western Alliance Agreement.

CSL Seqirus, Inc. Collaboration and License Agreement

We entered into the CSL Collaboration Agreement with Seqirus, Inc. (“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 of self-amplifying mRNA vaccines.

CSL Seqirus will receive 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 potentially receive development milestones totaling more than $1.3 billion if all products are registered in the licensed fields. We will also be entitled to potentially 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.

In March 2023, Arcturus achieved development milestones, including milestones associated with nominating next generation vaccine candidates, resulting in $90.0 million due from CSL Seqirus.

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.

Grant from the Biomedical Advanced Research and Development Authority

On August 31, 2022, we entered into a cost reimbursement contract (the “BARDA Contract”) with BARDA 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

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our permitted costs up to $63.2 million. During the year ended December 31, 2022, we incurred $0.2 million that is expected to be reimbursed during the first quarter of 2023.

Grants from the Economic Development Board of the Republic of Singapore

On March 4, 2020, we were awarded a grant (“Grant 1”) from the EDB to support the co-development of a potential COVID-19 vaccine program with the Duke-NUS Medical School. Grant 1 provided for up to S$14.0 million (approximately US$10.0 million using the exchange rate at the time the grant contract was entered into) in grants to support the development of the vaccine. Grant 1 has been paid in full by the EDB as a result of the achievement of certain milestones related to the progress of the development of the vaccine, as set forth in the award agreement. The funds received have been recognized as contra research and development expense. The parties are in continued negotiations with respect to amendments of Grant 1. The Company does not believe there will be any further obligations related to this grant.

On October 2, 2020, we were awarded another grant (“Grant 2”) from the EDB to support the clinical development of a potential COVID-19 vaccine (ARCT-021). Grant 2 provides for up to S$9.3 million (approximately US$6.7 million) to support the clinical development of the vaccine candidate for costs incurred in Singapore subject to certain conditions. Grant 2 is to be paid in two installments upon the achievement of certain milestones related to the progress of the development of the vaccine candidate. We received the first installment of $3.6 million in the fourth quarter of 2020. A portion of the funds received were recognized as contra research and development expense as costs were incurred during the fourth quarter of 2020. As costs were incurred during fiscal year 2021, we recognized the remaining amount of the first installment as contra expense for Grant 2. The parties are in continued negotiations with respect to amendments of Grant 2. The Company does not believe there will be any further obligations related to this grant.

Manufacturing Support Agreement

On November 7, 2020, we entered into the EDB “Support Agreement” with the EDB. Pursuant to the EDB Support Agreement, the EDB agreed to make a term loan (the “Singapore Loan”) of US$62.1 million, subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (ARCT-021). On March 23, 2023, we and the EDB agreed to certain amendments to the EDB Agreement, including that (i) the audit of the funds utilized for ARCT-021 is to be completed on March 22, 2023, (ii) EDB waiving the loan and interest on funds used to manufacture ARCT-021, (iii) upon audit completion we will pay EDB interest (calculated at 4.5% per annum) and principal for outstanding funds not used for ARCT-021 by March 30, 2023 and (iv) the delivery requirement of ARCT-021 shall be waived. The result of this notice is that we paid $17.1 million to Singapore and released the ARCT-021 liability in the amount of $33.3 million during the first quarter of 2023.

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 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 of $391.9 million 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 (iv) continued exploratory activities related to our platform and other general administrative activities.

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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, incur costs in excess of our forecasts, or do not meet covenant requirements of our debt, 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.

The following table shows a summary of our cash flows for the year ended December 31, 2022 and 2021:

Operating Activities

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.

Net cash used in operating activities in 2021 was $135.0 million and consisted net loss of $203.7 million less non-cash adjustments of $36.0 million, plus a net change in assets and liabilities of $32.6 million. Non-cash items primarily included stock-based compensation of $28.9 million, acquired in-process research and development expense of $5.0 million and depreciation and amortization of $1.2 million. The net change in assets and liabilities was primarily due to an increase in deferred revenue of $32.8 million, an increase in accrued liabilities of $4.1 million and a decrease in right-of-use assets of $1.4 million, partially offset by an increase in prepaid expenses and other current assets of $2.3 million, a decrease in lease liabilities of $1.4 million, an increase in accounts receivable of $1.2 million and a decrease in accounts payable of $0.8 million.

Investing Activities

Net cash used in investing activities of $7.7 million in 2022 and $3.4 million in 2021 reflected the acquisition of property and equipment.

Financing Activities

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.

Net cash provided by financing activities of $48.0 million for 2021 consisted of net proceeds from the Singapore Loan of $46.6 million, proceeds from the exercise of stock options of $0.9 million and proceeds from the issuance of common stock related to our employee stock purchase plan of $0.5 million.

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Funding Requirements

We anticipate that we will continue to generate annual net 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, continued funding from partners at anticipated levels and our payment obligations continuing to follow the current maturity schedule under our long-term credit facility referenced in Note 7 to our consolidated financial statements in this Annual Report. 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 partnered LUNAR-COV19 and LUNAR-FLU vaccine candidates;

•
the achievement of milestones under our strategic alliance agreements;

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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;

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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.

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

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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 increased by $193.6 million during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase in revenue during 2022 primarily relates to $154.4 million of increased revenue related to the CSL Collaboration Agreement executed in the fourth quarter of 2022, an increase in revenue of $20.2 million related to the agreement with Vinbiocare, an increase of $12.5 million related to the recognition of reservation fees from the Israeli MOH and an increase of $6.1 million related to the Janssen collaboration which was terminated during the fourth quarter of 2022.

Operating Expenses

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

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 expense decreased by $26.0 million during 2022, primarily reflecting decreased manufacturing costs of $18.9 million, decreased clinical costs of $11.2 million, increased contra research and development expense recognized from collaborations and grants of $5.0 million. The decreases were primarily offset by increased personnel-related expenses of $6.3 million and increased facility-related expenses of $3.3 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 collaboration with CSL Seqirus 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 CF program. Discovery technologies represents our efforts to expand our product pipeline and are primarily related to pre-partnered studies and new capabilities assessment. For several of our programs, the activities are part of our collaborative and other relationships and the expenses may be partially

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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 and are expected to continue to increase in the near future as we continue increase headcount to meet the needs of our external pipeline, platform and clinical trial efforts. Additionally, personnel related expenses will continue to rise as we increase salaries in line with increases in the market rates in order to retain our employees.

Facilities and equipment expenses continue to increase as we expand. During the year ended December 31, 2022, we incurred increased rent and associated costs related to a new facility we took possession of in April 2022. Facilities and equipment expenses are expected to increase in the near term due to increased rent expense related to our new facility.

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 $46.1 million in the year ended December 31, 2022 and $41.5 million in the year ended December 31, 2021. The increase resulted primarily from personnel expense due to increased salaries and share-based compensation expense, increased legal fees and increased facilities costs related to our new building. We expect general and administrative expenses to increase in 2023 as we expand our headcount and professional services to execute our business plan.

Finance income (expense), net

Interest income is generated on cash and cash equivalents. The increase in interest income from 2021 to 2022 was primarily the result of increased interest rates.

Interest expense during the year ended December 31, 2022 was incurred in conjunction with the Western Loan Agreement and the Singapore Loan. The increase in interest expense during 2022 as compared to the prior year period was primarily a result of additional accrued interest expense on the Singapore Loan that was funded in January 2021 and increased interest expense on the Western Loan Agreement related to increased interest rates.

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, 2022. 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

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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 services on a stand-alone basis. The estimate of the relative stand-alone selling price requires us in some cases to make significant judgements. 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

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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.

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 accrual estimates have not been materially different from our actual costs.

Off-balance sheet arrangements

None.

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

Arcturus is a late-stage global clinical messenger RNA medicines company focused on the development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases. In addition to our messenger RNA platform, our proprietary lipid nanoparticle 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.

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. Our key proprietary technology has the potential to address the major hurdles in RNA 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 puts us in a leading position to deliver on the next generation of nucleic acid medicines.

During 2021, together with Vinbiocare, we advanced ARCT-154, our investigational next generation, self-amplifying mRNA-based vaccine for COVID-19, into a Phase 1/2/3 study in Vietnam, which is being funded by Vinbiocare. With Vinbiocare, we completed submission of regulatory documents to the Ministry of Health in Vietnam with respect to application for an Emergency Use Authorization for ARCT-154 (LUNAR-COV19).

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 achieve sustainable revenues and profit from operations. As of December 31, 2021, we had an accumulated deficit of $347.5 million.

Liquidity and Capital Resources

Overview

Since our inception, we have funded our operations principally with proceeds from the sale of capital stock and revenues earned through collaborative agreements. At December 31, 2021, we had $370.5 million in unrestricted cash and cash equivalents.

Pursuant to the Third Amendment to the Loan and Security Agreement with Western Alliance Bank (the “Loan”), the Bank agreed to make a term loan to us on October 30, 2019, in the amount of $15.0 million (the “Term Loan”). The Term Loan bears interest at a floating rate ranging from 1.25% to 2.75% above the prime rate. The amendment further provides that the Term Loan has a maturity date of October 30, 2023. In October of 2021, we entered into a Fifth Amendment to Loan Agreement which provided for a six month extension to the interest only period which moves the first principal payment to May 1, 2022.

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Grants from the Economic Development Board of the Republic of Singapore

On March 4, 2020, we were awarded a grant (“Grant 1”) from the Economic Development Board of the Republic of Singapore (the “EDB”) to support the co-development of a potential COVID-19 vaccine program with the Duke-NUS Medical School. The Grant provides for up to S$14.0 million (approximately US$10.0 million using the exchange rate at the time the grant contract was entered into) in grants to support the development of the vaccine. The Grant has been paid in full by the EDB as a result of the achievement of certain milestones related to the progress of the development of the vaccine, as set forth in the award agreement. The funds received have been recognized as contra research and development expense. The parties are in continued negotiations with respect to amendments of Grant 1. Currently, we are liable for certain expenses during the program and are also subject to certain conditions including the requirement to pay an agreed upon royalty rate to Duke-NUS on future net sales of the LUNAR-COV19 vaccine candidate developed with Duke-NUS in markets or jurisdictions outside of Singapore.

On October 2, 2020, we were awarded another grant (“Grant 2”) from the Singapore EDB to support the clinical development of a potential COVID-19 vaccine (ARCT-021). The grant provides for up to S$9.3 million (approximately US$6.7 million) to support the clinical development of the vaccine candidate for costs incurred in Singapore subject to certain conditions. The grant is paid in two installments upon the achievement of certain milestones related to the progress of the development of the vaccine candidate. We received the first installment of $3.6 million in the fourth quarter of 2020. A portion of the funds received were recognized as contra research and development expense as costs were incurred during the fourth quarter of 2020. As costs were incurred during fiscal year 2021, we recognized the remaining amount of the first installment as contra expense for Grant 2. The parties are in continued negotiations with respect to amendments of Grant 2 that could include initiation of a clinical trial for a variant COVID-19 vaccine.

Manufacturing Support Agreement

On November 7, 2020, we entered into a Manufacturing Support Agreement (the “Support Agreement”) with the EDB. Pursuant to the Support Agreement, the EDB agreed to make a term loan (the “Singapore Loan”) of S$62.1 million, subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (ARCT-021). The EDB has agreed to an extension of the reconciliation period to March 31, 2022 with unused funds as of such date to be subsequently returned within thirty days, subject to any further agreed upon extension of the reconciliation date. The parties are in continued negotiations with respect to amendments of the Singapore Loan terms. Under current terms, (i) we are to provide a quarterly reconciliation report within forty-five days of each financial quarter end, (ii) we will provide a projection of expenditures through March 31, 2022 followed by an audited statement of actual expenditures through March 31, 2022 by June 30, 2022, (iii) we are to provide EDB with a right of first refusal on GMP manufacturing slots of the LUNAR-COV19 vaccine candidate up to an agreed-upon maximum amount, (iv) and the obligation to repay the Singapore Loan will be secured by an interest in the raw materials and manufacturing equipment purchased by us with the funds from the Singapore Loan in form and substance satisfactory to the EDB in its sole discretion. We elected to borrow the full amount available under the Support Agreement of S$62.1 million ($46.6 million) on January 29, 2021. As of December 31, 2021, we have reported a portion of the Singapore Loan as current to reflect a potential payment in fiscal year 2022. As of December 31, 2021, we reported a portion of the Singapore Loan as current to reflect a potential principal repayment of approximately 20.9 million Singapore dollars (US $15.2 million) in fiscal year 2022 based on amounts not used toward the manufacture of ARCT-021.

The Singapore Loan accrues interest at a rate of 4.5% per annum calculated on a daily basis. Subject to certain exceptions, the Singapore Loan is intended to be a limited recourse loan that will be repaid solely through a royalty payment of 10% of net sales proceeds of the LUNAR-COV19 vaccine candidate, up to the amount of the outstanding principal and interest under the Singapore Loan. However, all unpaid principal and interest under the Singapore Loan will be due and payable five years after draw date, if net sales of the LUNAR-COV19 vaccine exceed a certain minimum threshold during this five year period or we obtain clearance to sell the vaccine in specified jurisdictions. Unpaid principal and interest under the Singapore Loan will also become due and payable upon an event of default under the Support Agreement. The first vaccine sales, including the amount of net sales, shall be reported to EDB within 10 days of delivery and quarterly reports of aggregate vaccine sales, including net sales proceeds shall be provided within 30 days after quarter end.

The Singapore Loan is forgivable if we have not obtained regulatory approval by the final repayment date and net sales of LUNAR-COV19 are less than $100 million. If, any portion of the Singapore Loan is required to be forgiven pursuant to the terms of the Support Agreement, the EDB has the right to take ownership of certain raw

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materials and equipment that were purchased by us with proceeds of the Singapore Loan (the “Specified Assets”). We entered into a security agreement (the “Security Agreement”) for the benefit of the EDB to provide that repayment of the Singapore Loan and related obligations are secured by a lien on the Specified Assets.

In connection with the entry into the Support Agreement, we entered into a consent agreement with Western Alliance Bank (the “Bank”) and an amendment to the Loan and Security Agreement, dated as of October 12, 2018, to exclude the Specified Assets from Western Alliance Bank’s lien on certain assets.

Vinbiocare Agreement

On August 2, 2021, we announced an agreement with Vinbiocare, a member of Vingroup Joint Stock Company, to establish a manufacturing facility in Vietnam for the manufacture of our investigational COVID-19 vaccine program, for sale and use within Vietnam. In addition, Vinbiocare agreed to execute a phase 1/2/3 study in Vietnam.

Under the terms of the arrangement, Vinbiocare is building out a manufacturing facility in Vietnam, and we have provided to Vinbiocare access to proprietary technologies and processes for the manufacture of our investigational COVID-19 vaccine candidate. We also provided Vinbiocare with an exclusive license to manufacture the vaccines in Vietnam at the facility solely for distribution in Vietnam. The license and technology transfer applies toward drug product manufacturing but not toward mRNA drug substance manufacturing. Vinbiocare made an upfront payment of $40 million and is responsible for costs associated with the technology transfer. Vinbiocare will also pay for mRNA drug substance supplied by us and royalties on vaccines produced at the manufacturing facility.

General Financial Resources

A significant portion of our current cash balance of $370.5 million is expected to be utilized during fiscal year 2022 to fund (i) further progress of our COVID and FLU vaccine programs, (ii) the continued Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (iii) advances to our LUNAR-CF program toward submission of a CTA during the second half of 2022 and (iv) continued expansion of our platform and other general administrative activities.

We expect to receive in the near term significant data from studies of our COVID 19 vaccine and regulatory guidance which will determine our course of action with respect to the development and commercialization of our vaccine candidate. Commercialization of ARCT-154 will require significant additional funds. We are considering additional partnering opportunities to assist in these efforts. We cannot be certain that we will identify a partner or enter into an acceptable arrangement. We will continue to evaluate our business opportunities in a surgical manner to maximize our ability to develop approved products while making most efficient use of our available resources.

We entered into binding agreements with third party contract manufacturing organizations with upfront financial commitments of not less than $13 million.

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 for the foreseeable future, and we will need to raise additional debt or equity financing or enter into additional partnerships to fund development. Our ability to transition to profitability is dependent on identifying and developing successful mRNA drug and vaccine candidates. If we are not able to achieve planned milestones, incur costs in excess of our forecasts, or do not meet covenant requirements of our debt, 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.

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The following table shows a summary of our cash flows for the year ended December 31, 2021, 2020 and 2019 (in thousands):

Operating Activities

Our primary use of cash is to fund operating expenses, which consist mainly of research and development and general and administrative expenditures. We have incurred significant expenses which have been partially offset by cash collected through our collaboration agreements. Cash collections under the collaboration agreements can vary from year to year depending on the terms of the agreement and work performed. These changes on cash flows primarily relate to the timing of cash receipts for upfront payments, reimbursable expenses and achievement of milestones under these collaborative agreements.

Net cash used in operating activities was $135.0 million on a net loss of $203.7 million for 2021, $42.9 million on a net loss of $72.1 million for 2020 and $6.4 million on a net loss of $26.0 million for 2019. Adjustments for non-cash charges which includes share-based compensation expense and depreciation and amortization were $37.4 million for 2021, $8.1 million for 2020 and $3.6 million for 2019. Changes in working capital resulted in adjustments to operating net cash inflows of $31.2 million for 2021, $21.2 million for 2020 and $16.0 million for 2019. The significant adjustments to operating net cash inflows for 2021 were primarily due to the agreement with Vinbiocare signed in the third quarter of 2021 along with increased accrued liabilities from LUNAR-COV19 and LUNAR-OTC (ARCT-810) clinical trial activities, which expenses were incurred as discussed below. Adjustments to operating net cash inflows for 2020 were primarily due to the supply agreement with Israeli MOH signed in the third quarter of 2020 along with increased accounts payable and accrued liabilities from LUNAR-COV19  and LUNAR-OTC (ARCT-810) clinical trial activities. Lastly, adjustments to operating net cash inflows for 2019 were primarily due to the third amendment to the collaboration agreement with Ultragenyx during the second quarter of 2019 along with increased accounts payable and accrued liabilities from LUNAR-OTC (ARCT-810).

Investing Activities

Net cash used in investing activities of $3.4 million for 2021, $1.7 million for 2020 and $0.8 million for 2019 reflected the acquisition of property and equipment.

Financing Activities

Net cash provided by financing activities of $48.0 million for 2021 consisted of net proceeds from the Singapore Loan of $46.6 million, proceeds from the exercise of stock options of $0.9 million and proceeds from the issuance of common stock related to our employee stock purchase plan of $0.5 million. Net cash provided by financing activities of $436.1 million for 2020 consisted of net proceeds from the issuance of common stock in three underwritten public offerings totaling $423.8 million, net proceeds of $9.6 million from the issuance of common stock to Ultragenyx upon the exercise of its option and proceeds from the exercise of stock options of $2.7 million. Net cash provided by financing activities of $41.9 million for 2019 consisted of net proceeds from the issuance of common stock of $15.5 million to Ultragenyx, net proceeds from the issuance of common stock of $21.3 million related to public offerings, net proceeds from long-term debt of $4.9 million, and proceeds from the exercise of stock options of $0.1 million.

Funding Requirements

We anticipate that we will continue to generate annual net 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

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expenses, continued funding from partners at anticipated levels and our payment obligations continuing to follow the current maturity schedule under our long-term credit facility referenced in Note 7 to our consolidated financial statements in this Annual Report. 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:

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 (in thousands):

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Revenue increased by $2.8 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase in revenue primarily relates to $4.4 million of increased revenue related to the agreement with Vinbiocare executed in the third quarter of 2021. The overall increase in revenue was primarily offset by a decrease in revenue of $1.6 million from our existing collaboration partners.

Revenue decreased by $11.3 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019. The decrease in revenue primarily relates to (i) $5.6 million of decreased revenue from reduced reimbursements associated with the CureVac co-development agreement that terminated in the second quarter of 2019, (ii) a decrease in one-time sublicense revenue from Synthetic Genomics as we recognized sublicense revenue of $3.3 million during the second quarter of 2019, (iii) a reduction of $1.9 million in revenue recognized related to the Ultragenyx Agreement, as we recorded a large amount of upfront payment amortization upon the execution of the Ultragenyx Third Amendment during the second quarter of 2019 and also recognized fewer research and development expense reimbursements related to the Ultragenyx Agreement during 2020, and (iv) lower research and development expense reimbursements recognized in 2020 related to other collaboration agreements, including with Providence Therapeutics and Takeda. The decrease in revenue was partially offset by increased revenue recognition related to the Janssen agreement and other collaboration agreements.

Operating Expenses

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

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 and laboratory supplies related to conducting research and development activities. Costs to acquire and manufacture pre-launch inventory, mRNA supply for preclinical studies and clinical trials are recognized and included in external pipeline development expenses for the specific program.

LUNAR-COV19 expenses increased by $79.7 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Expenses incurred were partially offset with funds awarded by the Singapore

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EDB. The LUNAR-COV19 program did not commence until late in the first quarter of 2020 and is now in late-stage clinical trials.

LUNAR-CF expenses were $4.8 million in the year ended December 31, 2021, $4.4 million in the year ended December 31, 2020 and $0.8 million in the year ended December 31, 2019. Expenses incurred were partially offset with funds awarded by the CFF. The increase in LUNAR-CF expenses was due primarily to increased research and development cost incurred in association with the amendment to the CFF Agreement executed in July 2019, and we expect that our development efforts and associated costs will increase over the next several years as the LUNAR-CF program moves toward expected CTA submission in the second half of 2022.

LUNAR-OTC expenses were $7.3 million for the year ended December 31, 2021, $13.0 million for the year ended December 31, 2020 and $15.6 million for the year ended December 31, 2019. The decreases for each year are related to slower than expected recruiting for the ARCT-810 clinical trial caused in part by the ongoing Covid environment.

Discovery technologies represents our efforts to expand our product pipeline and are expected to increase in the near future. Discovery technology expenses were $20.3 million in the year ended December 31, 2021, $1.7 million in the year ended December 31, 2020 and $3.9 million in the year ended December 31, 2019. The increase in 2021 when compared to 2020 is primarily due to increased investment in new capabilities. Further, in the first quarter of 2021, we acquired an exclusive license from Alexion Pharmaceuticals to certain intellectual property for approximately $5.0 million of our common stock, which we expensed in 2021. The decrease in discovery technology expenses from 2019 to 2020 was due to focusing our efforts on the advancement of our LUNAR-OTC and LUNAR-COV19 programs.

Partnered discovery technologies expenses were $0.8 million in the year ended December 31, 2021, $1.5 million in the year ended December 31, 2020 and $1.9 million in the year ended December 31, 2019. The decreases in partnered discovery technologies expenses from 2020 to 2021 and 2019 to 2020 were primarily caused by decreased activity in rare disease targets and a greater focus on vaccine technology. We expect partnered discovery technologies expenses to fluctuate based on the needs of our collaboration partners.

Personnel related expenses, net of funds received from CFF and the Singapore EDB, were $34.9 million in the year ended December 31, 2021, $12.8 million in the year ended December 31, 2020 and $9.0 million in the year ended December 31, 2019. The increases were associated with increased headcount costs necessary to advance our external pipeline, platform and clinical trial efforts as well as increased share-based compensation expense.

Facilities and equipment expenses were $5.1 million in the year ended December 31, 2021, $3.5 million in the year ended December 31, 2020 and $2.4 million in the year ended December 31, 2019. The increases resulted primarily from higher rent and related costs associated with an additional lease that we entered into in February 2020. We expect that the facility and equipment expenses will increase in 2022 as we have added an additional facility in the second quarter of 2022 in order to support our research and development activities.

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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 $41.5 million in the year ended December 31, 2021, $23.2 million in the year ended December 31, 2020 and $12.7 million in the year ended December 31, 2019. The increases resulted primarily from personnel expense due to increased headcount and increased share-based compensation expense. We expect general and administrative expenses to increase in 2022 as we expand our headcount, facilities and professional services to execute our business plan.

Finance income (expense), net

Interest income is generated on cash and cash equivalents. The increases in interest income from 2020 to 2021 and from 2019 to 2020 resulted from increased interest on bank deposits due to higher cash balances, partially offset by lower interest rates earned.

Interest expense during the year ended December 31, 2021 was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank and the Singapore Loan. The increase in interest expense during 2021 as compared to the prior year period was primarily a result of additional accrued interest expense related to the Singapore Loan that was funded in January 2021. Interest expense was relatively flat for the year ended 2020 as compared to 2019 and was related to the Loan and Security Agreement with Western Alliance Bank.

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, 2021. 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 services, and manufacturing 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.

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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

If we were to allocate the transaction price to more than one performance obligation, we would make estimates of the relative stand-alone selling price of each performance obligation, as it is not typical for us to sell our goods or services on a stand-alone basis. The estimate of the relative stand-alone selling price would require us to make significant judgments. To date, we have not entered into a collaboration agreement with more than one performance obligation.

The research and development revenue we recognize each period is comprised of several types of revenue, including 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”).

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 CMOs. 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. Significant 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 accrual estimates have not been materially different from our actual costs.

Off-balance sheet arrangements

None.