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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-16 · 124 added, 88 removed, 117 unchanged (64% of the section changed)

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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.

We are an mRNA medicines company focused on significant opportunities within liver and respiratory rare diseases, and the development of infectious disease vaccines utilizing our STARR technology.

In addition to our internal mRNA platform, our proprietary lipid nanoparticle delivery system, LUNAR, enables multiple nucleic acid medicines.

The genetic medicines industry is constantly struggling to identify non-viral delivery solutions for large RNA molecules to different cell types.

Our LUNAR delivery technology is lipid mediated – and non-viral.

LUNAR is versatile, compatible with various types of RNA -- and has been shown to deliver large RNA to different cell types including liver hepatocytes, liver stellate cells, muscle cells (myocytes), and lung cells (including bronchial epithelial cells).

Arcturus is a global clinical-stage 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 mRNA platform, our proprietary lipid nanoparticle delivery system, LUNAR, has the potential to enable multiple nucleic acid medicines, and our proprietary STARR technology has the potential to provide longer-lasting RNA and sustained protein expression.

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 that the versatility of our platform to target multiple tissues, its compatibility with various nucleic acid therapeutics, and our expertise in developing scalable manufacturing processes put us in a good position to deliver on the next generation of nucleic medicines.

In August 2020, we announced the dosing of all subjects in the first cohort of the Phase 1 clinical study of our LUNAR-COV19 vaccine candidate.

The study was conducted with CTI Clinical Trial and Consulting Services, a global CRO, and in collaboration with Duke-NUS Medical School in Singapore.

In December 2020, we announced that we received approval from the Singapore HSA to proceed with a Phase 2 clinical study of the LUNAR-COV19 vaccine candidate.

Additionally, in October 2020, we announced the completion of the first three dose escalation cohorts in our ongoing Phase 1 study of ARCT-810, our messenger RNA-based therapeutic candidate for OTC deficiency.

Our activities since inception have consisted principally of performing research and development activities, general and administrative activities and raising capital to fund those efforts.

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Liquidity and Capital Resources

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, 2020, we had $462.9 million in unrestricted cash and cash equivalents.

On October 12, 2018, we entered into a Loan and Security Agreement with Western Alliance Bank whereby we received gross proceeds of $10.0 million under a long-term debt agreement (the “Loan”).

On October 30, 2019, we and the Bank entered into a Third Amendment (the “Third Amendment”) to the Loan and Security Agreement dated as of October 12, 2018 (as amended, the “Loan Agreement”).

Pursuant to the Third Amendment, 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 resulting net increase in the indebtedness of us was $5.0 million.

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.

We shall make monthly payments of interest only until the interest-only end date of October 1, 2021 and thereafter shall make monthly payments of principal and interest during a 24-month amortization period.

Upon maturity or prepayment, we will be required to pay a 2% fee as a result of the FDA’s approval to proceed with the Company’s LUNAR-OTC (ARCT-810) program based on its IND submission.

On March 4, 2020, we w ere awarded a grant (the “Grant”) from the Singapore E DB to support the co-development of a potential COVID-19 vaccine 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.

We entered into an amendment to the Grant on September 24, 2020 to update certain delivery and milestone timelines.

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 in proportion to the percentage covered by the E DB of the overall budget.

We are liable for certain expenses during the program and are also subject to certain conditions, including (i) completing an external audit within 183 days of the conclusion of the claim period on February 20, 2021, or August 22, 2021, and (ii) delivering 10 grams of LUNAR-COV19 vaccine candidate suitable for use in a phase 3 trial in two shipments with a partial shipment by June 30, 2021 and a remaining shipment by September 30, 2021 .

Additionally, we are required to pay an agreed upon royalty rate to Duke-NUS on future net sales of the LUNAR-COV19 vaccine candidate in markets or jurisdictions outside of Singapore .

On October 2, 2020, we were awarded another grant from the Singapore EDB to support the further development of a potential COVID-19 vaccine.

The grant provides for up to S$9.3 million (approximately US$6.7 million) to support the development of the vaccine candidate for costs incurred in Singapore subject to certain conditions including (i) completing an external audit within 183 days from March 31, 2021, or September 30, 2021, (ii) delivering 10 grams of LUNAR-COV19 vaccine candidate suitable for use in a phase 3 trial in two shipments with a partial shipment by June 30, 2021 and a remaining shipment by September 30, 2021 and (iii) creating an entity in Singapore which was completed during the fourth quarter of 2020.

The grant will 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.

On November 7, 2020, we entered into a Manufacturing Support Agreement (the “Support Agreement”) with the Economic Development Board of the Republic of Singapore (the “EDB”).

Pursuant to the Support Agreement, the EDB agreed to make a term loan of up to S$62.1 million , subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (the “Singapore Loan”).

The Singapore Loan and the related side letter includes certain loan covenants requiring (i) unused funds as of June 30, 2021 to be subsequently returned within thirty days, subject to the agreed upon extension of the reconciliation date, (ii) us to provide a quarterly reconciliation report within forty-five days of each financial quarter end, (iii) an external audit to be completed by September 26, 2021, (iv) us to deliver 10 grams of the LUNAR-COV19 vaccine candidate suitable for use in a phase 3 trial in two shipments with a partial shipment by June 30, 2021 and a remaining shipment by September 30, 2021, and (v) us 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.

We elected to borrow the full amount available under the Support Agreement of S$62.1 million, or $46.6 million, as a result of applicable exchange rates, on January 29, 2021.

The Singapore Loan accrues interest at a rate of 4% 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 the borrowing 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.

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 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 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 of Arcturus .

A significant portion of our current cash balance of $462.9 million along with the $46.6 million from the Singapore Loan is expected to be utilized during fiscal year 2021 to fund (i) the Phase 2 trial and anticipated Phase 3 trial of our current LUNAR-COV19 vaccine candidate, (ii) the continued Phase 1 trial and anticipated Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (iii) advancing our new LUNAR-FLU program toward submission of an IND, (iv) and other programs and administrative costs.

The Phase 3 trial of our LUNAR-COV19 vaccine candidate is expected to be funded primarily or exclusively through our cash reserves.

If we achieve EUA approval to market our LUNAR-COV19 vaccine candidate, we will need to raise additional funds through equity transactions, additional debt or prepayments from potential customers, among other options, to fund commercialization of LUNAR-COV19.

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.

Our future capital requirements are difficult to forecast and will depend on many factors.

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.

The ability of our Company to transition to profitability is dependent on identifying and developing successful mRNA drug candidates.

In the near future, 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 products, 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, 2020, 2019 and 2018 (in thousands):

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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 $6.4 million on a net loss of $26.0 million for the year ended December 31, 2019, compared to net cash used of $20.8 million on a net loss of $21.8 million for the year ended December 31, 2018.

Adjustments for non-cash charges which includes share-based compensation and depreciation and amortization were $3.6 million and $2.2 million for the year ended December 31, 2019 and 2018, respectively.

Changes in working capital resulted in adjustments to operating net cash inflows of $16.0 million for the year ended December 31, 2019, and net cash outflows of $1.2 million for the year December 31, 2018.

The significant adjustments to operating net cash inflows for the year ended December 31, 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), which expenses were incurred as discussed below .

Net cash used in operating activities was $42.9 million on a net loss of $72.1 million for 2020, $6.4 million on a net loss of $26.0 million for 2019 and $20.8 million on a net loss of $21.8 million for 2018.

Adjustments for non-cash charges which includes share-based compensation expense and depreciation and amortization were $8.1 million for 2020, $3.6 million for 2019 and $2.2 million for 2018.

Changes in working capital resulted in adjustments to operating net cash inflows of $21.2 million for 2020, net cash inflows of $16.0 million for 2019, and net cash outflows of $1.2 million for 2018.

The significant 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 (ARCT-021) and LUNAR-OTC (ARCT-810) clinical trial activities, which expenses were incurred as discussed below .

Investing Activities

Net cash used in investing activities of $0.8 million for the year ended December 31, 2019 reflected the acquisition of property and equipment.

Net cash provided by investing activities of $22.1 million for the year ended December 31, 2018 reflected proceeds from the maturities of our short-term investments of $30.2 million, offset by purchases of short-term investments of $6.6 million, and cash used to purchase property and equipment of $1.5 million.

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

Net cash provided by investing activities of $22.1 million for 2018 reflected proceeds from the maturities of our short-term investments of $30.2 million, offset by purchases of short-term investments of $6.6 million, and cash used to purchase property and equipment of $1.5 million.

Financing Activities

Net cash provided by financing activities of $41.9 million for the year ended December 31, 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.

Net cash provided by financing activities of $10.2 million for the year ended December 31, 2018 consisted of net proceeds from the exercise of stock options of $0.3 million and net proceeds from long-term debt of $9.9 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 of $423.8 million, net proceeds of $9.6 million from the issuance of common stock to Ultragenyx upon 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.

Net cash provided by financing activities of $10.2 million for 2018 consisted of net proceeds from the exercise of stock options of $0.3 million and net proceeds from long-term debt of $9.9 million.

Funding Requirements

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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 the first quarter of 2021, assuming, among other things, no significant unforeseen expenses, continued funding from partners at anticipated levels and our payment obligations under our long-term credit facility referenced in Note 7 to our Consolidated Financial Statements continuing to follow the current maturity schedule.

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 under our long-term credit facility referenced in Note 7 to our Consolidated Financial Statements continuing following the current maturity schedule.

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.

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

the development of ARCT-021, our LUNAR-COV19 vaccine candidate;

the achievement of milestones under our strategic alliance agreements;

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

Going Concern and Management’s Plans

Our products that are being developed have not generated significant revenue.

As a result, we have suffered recurring losses and require significant cash resources to execute our business plans.

These losses are expected to continue for an extended period of time.

Based on our current planned operations and clinical development plans, and giving effect to our planned pace of research, our current overhead, personnel costs and obligations under our credit facility, and possible limited access to working capital, we believe there is substantial doubt that our current cash and cash equivalents balances will be sufficient to fund our operations for at least twelve months after the date the consolidated financial statements are filed.

In drawing this conclusion we do not consider our ability to raise additional capital through equity, debt, collaborations or other funding arrangements with partners or through other sources of financing or to reduce the pace or scope of our activities.

These conditions raise substantial doubt about our ability to continue as a going concern for a period of one year from the date of the issuance of our 2019 consolidated financial statements.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern within one year after the date the financial statements are issued.

Historically, our major sources of cash have comprised proceeds from collaboration partners, various public and private offerings of our common stock, option and warrant exercises, and interest income.

From inception through December 2019, we raised approximately $210.4 million in gross proceeds from various public and private offerings of our common stock, debt issuances, collaboration agreements, and the merger with Alcobra Ltd.

As of December 31, 2019, we had approximately $71.5 million in cash, restricted cash and cash equivalents.

Our plans to mitigate an expected shortfall of capital, to support future operations, include raising additional funds.

We also recognize we will need to raise additional capital in order to continue to execute our business plan in the future.

There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to us or whether we will become profitable and generate positive operating cash flow.

If we are unable to raise sufficient additional funds, we will have to scale back our operations.

Since our inception, we have funded our operations principally with proceeds from the sale of capital stock, convertible notes and revenues earned through collaborative agreements.

At December 31, 2019, we had $71.4 million in unrestricted cash and cash equivalents.

On October 12, 2018, we entered into a Loan and Security Agreement with Western Alliance Bank whereby we received gross proceeds of $10.0 million under a long-term debt agreement (the “Loan”).

The Loan has a maturity date of October 1, 2022 and carries interest at the U.S.

prime rate plus 1.25%.

The loan has an interest-only period of 19 months, which could be extended by an additional 6 months if certain conditions are met, followed by an amortization period of 30 months, or 24 months if the interest-only period is extended.

Upon maturity or prepayment, we will be required to pay a 3% fee, or a 2% fee if the U.S.

Food and Drug Administration accepts certain Investigational New Drug applications prior to maturity.

On October 30, 2019, we and the Bank entered into a Third Amendment (the “Third Amendment”) to the Loan and Security Agreement dated as of October 12, 2018 (as amended, the “Loan Agreement”).

Pursuant to the amendment, the Bank agreed to make a term loan to us on October 30, 2019, in the amount of $15 million (the “Term Loan”).

The resulting net increase in the indebtedness of us was $5 million.

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.

We shall make monthly payments of interest only until the interest-only end date of April 1, 2021, which is subject to extension to October 1, 2021 upon the occurrence of an equity or expansion event and the absence of an event of default, and thereafter shall make monthly payments of principal and interest during a 30-month amortization period.

The Term Loan also includes covenants which include our submission of a clinical candidate for IND application, made to the U.S.

Food and Drug Administration by May 31, 2020 and obtaining acceptance by June 30, 2020.

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 the 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.

Our future capital requirements are difficult to forecast and will depend on many factors.

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.

The ability of our Company to transition to profitability is dependent on identifying and developing successful mRNA drug candidates.

There can be no assurances that additional financing will be secured or, if secured, will be on favorable terms.

These conditions raise substantial doubt about the business, results of operations, financial condition and/or our ability to fund scheduled obligations on a timely basis or at all.

The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.

The consolidated financial statements do not reflect any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary if we are unable to continue as a going concern.

Results of Operations

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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.

We enter into arrangements with pharmaceutical and biotechnology partners 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.

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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Collaboration revenue

Collaboration 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 collaboration 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 collaboration revenue was partially offset by increased revenue recognition related to the Janssen agreement and other collaboration agreements.

Collaboration revenue increased by $5.0 million during the year ended December 31, 2019 as compared to the year ended December 31, 2018.

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These increases were primarily offset by negligible decreases from various programs and decreased revenue of $0.9 million associated with Ultragenyx as the collaboration agreement had less activity compared to the prior year.

On February 11, 2019, we announced the termination of the obligations of Cure V ac for preclinical development, effective 180 days from February 5, 2019 and the re-assumption by us of the worldwide rights thereto.

We reassume d 100% of the glo bal rights of our flagship asset and clinical development candidate, a messenger RNA (mRNA) drug to treat ornithine transcarbamylase (OTC) deficiency.

Operating Expenses

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LUNAR-OTC (ARCT-810)

LUNAR-CF, net

LUNAR-CF (ARCT-032), net

LUNAR-COV19 (ARCT-021), net

Discovery technologies

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expenses, net

Greater than 100%

Research and Development Expenses, net

Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies performed by contract research organizations, clinical and regulatory consultants, and laboratory supplies for research and development activities.

LUNAR-OTC (ARCT-810) expenses for the year ended December 31, 2019 increased by $11.9 million, from $3.7 million in 2018 to $15.6 million in 2019.

The increase in LUNAR-OTC (ARCT-810) expenses was due primarily to preparation for an IND application, which was submitted during the first quarter of 2020.

Lunar-CF expenses for the year ended December 31, 2019 increased by $0.5 million, from $0.3 million in 2018 to $0.8 million in 2019.

This amount was offset with funds awarded by the CFF.

The increase in LUNAR-CF expenses was due primarily to 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 IND submission in 2021.

Discovery technologies represents o ur efforts to expand our product pipeline .

Discovery technology expenses for the year ended Dec ember 3 1 , 2019 increased by $ 1 .

0 millio n, or 33.8%, from $2.9 million in 2018 to $3.9 million in 2019.

The increase in discovery technology expenses was due to a dditional efforts to add new capabilities necessary to expand our future platform technology and discovery of our next programs.

Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies 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.

The IND for our LUNAR-OTC program was accepted by the FDA in April 2020.

However, the ongoing pandemic has delayed patient enrollment, resulting in lower clinical costs.

As a result, LUNAR-OTC expenses for the year ended December 31, 2020 decreased by $2.6 million as compared to the year ended December 31, 2019.

LUNAR-OTC expenses for the year ended December 31, 2019 increased by $11.9 million as compared to the year ended December 31, 2018.

The increase from 2018 to 2019 was due primarily to preparation for an IND application, which was submitted during the first quarter of 2020.

LUNAR-CF expenses were $4.4 million in the year ended December 31, 2020, $0.8 million in the year ended December 31, 2019 and $0.3 million in the year ended December 31, 2018.

The increase in LUNAR-CF expenses from 2018 to 2019 and from 2019 to 2020 was due primarily to 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 IND submission in 2022.

These amounts are net of funds awarded by the CFF.

In March 2020, we signed a contract for approximately $10.0 million (using the exchange rate at the time the grant contract was entered into) with the Singapore Economic Development Board that will fund a portion of the costs incurred in our LUNAR-COV19 program.

In October 2020, we entered into an additional grant agreement for approximately $6.7 million (using the exchange rate at the time the grant contract was entered into).

We expect that the program costs and pre-launch inventory costs will continue to increase as clinical trials progress and we advance program development.

The research and development costs were $20.9 million for the year ended December 31, 2020.

There were no comparable costs in 2019 or 2018.

Discovery technologies represents our efforts to expand our product pipeline.

Discovery technology expenses were $1.7 million in the year ended December 31, 2020, $3.9 million in the year ended December 31, 2019 and $2.9 million in the year ended December 31, 2018.

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.

The increase in discovery technology expenses from 2018 to 2019 was due to additional efforts to add new capabilities necessary to expand our future platform technology and discovery of our next programs.

These efforts have resulted in new programs such as STARR technology.

Partnered discovery technologies expenses for the year ended December 31, 2019 were $1.9 million, approximately the same as in 2018.

Partnered discovery technologies expenses were $1.5 million in the year ended December 31, 2020, $1.9 million in the year ended December 31, 2019 and $2.0 million in the year ended December 31, 2018.

in p artnered discovery technologies expen ses from 2019 to 2020 was primarily caused by a decrease in activity relating to our collaboration with Takeda .

We expect partnered discovery technologies expenses to fluctuate based on the needs of our collaboration partners.

Personnel related expenses for the year ended December 31, 2019 increased by $2.5 million, or 37.8% from $6.5 million in 2018 to $9.0 million in 2019.

The increase in personnel related expenses was due primarily to increased headcount necessary to advance our external pipeline and platform efforts, and was offset by $0.9 million of funds received from the CFF.

Personnel related expenses, net of funds received from CFF and the Singapore EDB, were $12.8 million in the year ended December 31, 2020, $9.0 million in the year ended December 31, 2019 and $6.5 million in the year ended December 31, 2018.

The increase in personnel related expenses from 2019 to 2020 was primarily due to (i) increased headcount related to the addition of our LUNAR-COV19 program and (ii) increased share-based compensation expense resulting from our increased stock price in 2020.

The increase in personnel related expenses from 2018 to 2019 was due primarily to increased headcount necessary to advance our external pipeline and platform efforts.

We expect personnel related expenses to increase in 2021 as we expand our headcount to execute our business plan.

Facilities and equipment expenses for the year ended December 31, 2019 increased by $0.9 million, or 59.3%, from $1.5 million in 2018 to $2.4 million in 2019.

The increase in facilities and equipment expenses was due primarily to higher rent and related costs associated with our new headquarter lease.

Facilities and equipment expenses were $3.5 million in the year ended December 31, 2020, $2.4 million in the year ended December 31, 2019 and $1.5 million in the year ended December 31, 2018.

The increase in facilities and equipment expenses from 2019 to 2020 was primarily due to the lease of a second building entered into in early 2020.

The increase in facilities and equipment expenses from 2018 to 2019 was due primarily to higher rent and related costs associated with our headquarter lease.

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 for the year ended December 31, 2019 decreased by $7.9 million, or 38.5%, from $20.5 million in 2018 to $12.6 million in 2019.

The decrease in general and administrative expenses was primarily due to (i) non-recurring proxy, legal and related costs incurred in 2018 of $7.3 million, which did not recur in 2019, and (ii) an insurance settlement of $2.4 million relating to the proxy matter that was recorded as contra-G&A expense when it was received in 2019, offset by increases in personnel costs of $1.1 million, public company related expenses of $0.4 million, and facilities and other costs of $0.3 million.

Without the effect of the one-time proxy costs, general and administrative expenses would have been relatively consistent with the prior year.

General and administrative expenses were $23.2 million in the year ended December 31, 2020, $12.7 million in the year ended December 31, 2019 and $20.6 million in the year ended December 31, 2018.

The increase in general and administrative expenses from 2019 to 2020 was primarily caused by (i) a $5.9 million increase in personnel related expenses due to increased headcount and increased share-based compensation, (ii) a $1.6 million increase in facilities and insurance expenses due to the execution of a new lease agreement and (iii) a $2.3 million increase in professional fees due to a $2.4 million insurance settlement received in 2019 relating to the proxy matter that was recorded as contra-general and administrative expense.

The decrease in general and administrative expenses from 2018 to 2019 was primarily due to (i) non-recurring proxy, legal and related costs incurred in 2018 of $7.3 million, which did not recur in 2019, and (ii) the insurance settlement of $2.4 million relating to the proxy matter that was recorded as contra-G&A expense when it was received in 2019, offset by increases in personnel costs of $1.1 million, public company related expenses of $0.4 million, and facilities and other costs of $0.3 million.

Without the effect of the one-time proxy costs, general and administrative expenses would have been relatively consistent between 2018 and 2019.

We expect general and administrative expenses to increase in 2021 as we expand our headcount, facilities and professional services to execute our business plan.

Finance income (expense), net

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Interest expense

Greater than 100%

Interest income is generated on cash and cash equivalents.

For the year ended December 31, 2020, the increase in interest income compared to the year ended December 31, 2019 resulted from increased interest on bank deposits due to higher cash balances, partially offset by lower interest rates earned.

For the year ended December 31, 2019, the decrease in interest income compared to the year ended December 31, 2018 resulted from decreased investments.

Interest expense relates to the long-term debt with Western Alliance Bank.

The increase in interest expense for the year ended 2019 as compared to 2018 was due to an entire year of interest incurred during 2019 versus one quarter of interest incurred during the fourth quarter of 2018.

Interest expense was relatively flat for the year ended 20 20 as compared to 201 9 .

The increase in i nterest expense for the year ended 2019 as compared to 2018 was due to an entire year of interest incurred during 2019 versus one quarter of interest incurred during the fourth quarter of 2018.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S.

As such, we make certain estimates, judgements and assumptions that we believe are reasonable, based upon information available to us.

These judgements involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our results of operations and financial condition.

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, 2020.

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Our collaboration agreements typically contain promised goods and services, including technology licenses or options to obtain technology licenses, R&D services, and manufacturing services.

Upon entering into a collaboration agreement, we are required to make the following judgements:

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 judgement.

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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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 judgements.

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 R&D 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 judgements and estimates.

Each of these types of revenue require us to make various judgments and estimates.

Amortization from Upfront Payments

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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.

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.

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

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis