What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-03-01 · 101 added, 93 removed, 148 unchanged (57% 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.

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.

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 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.

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.

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At December 31, 2021, we had $370.5 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.

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.

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.

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.

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 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.

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.

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.

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 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.

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.

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”).

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

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.

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.

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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.

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.

The following table shows a summary of our cash flows for the year ended December 31, 2021, 20 20 and 201 9 (in thousands):

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Financing activities

Net increase in cash and restricted cash

Net increase (decrease) in cash and restricted cash

Operating Activities

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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 $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 .

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 $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.

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 $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 $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.

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 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.

expenses, continued funding from partners at anticipated levels and our payment obligations continuing to follow the current maturity schedule under our l ong-term credit facility referenced in Note 7 to our c onsolidated f inancial s tatements 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.

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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 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;

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(Dollars in thousands)

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.

The increase in revenue during the year was caused by a ramp up in activities on the Janssen collaboration agreement which led to an increase in revenue of $1.7 million.

Additionally, an increase of $2.2 million was due to settling the terminated co-development program with CureVac (as discussed in the following paragraph) along with an increase in amortized revenue that was previously deferred.

Lastly, there was an increase in revenue from Synthetic Genomics Inc.

of $2.1 million due to recognizing revenue related to a sublicense payment during the year.

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.

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

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External pipeline development expenses:

LUNAR-OTC (ARCT-810)

LUNAR-COV19, net

LUNAR-CF (ARCT-032), net

LUNAR-COV19 (ARCT-021), net

LUNAR-OTC (ARCT-810)

Discovery technologies

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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, personnel related expenses and laboratory supplies related to conducting research and development activities.

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.

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-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

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.

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.

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.

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 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.

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 .

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 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.

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 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.

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.

General and Administrative Expenses

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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 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.

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.

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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.

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.

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

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Research and development revenue under collaborative agreements

We recognize R&D revenue from several collaboration agreements.

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

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:

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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.

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 R&D services.

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 R&D services or the total length of time it will take us to complete our promised R&D services.

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.

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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.

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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