# Arcturus Therapeutics Holdings Inc. (ARCT) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from Arcturus Therapeutics Holdings Inc.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1768224/000156459022007832/arct-10k_20211231.htm Accession: 0001564590-22-007832 Filing date: 2022-03-01 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/ARCT/ All MD&A years: /company/ARCT/mda/ Next year: /company/ARCT/mda/fy2022/ (FY 2022) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis together with the consolidated financial statements and related notes included elsewhere herein. This report includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements. Overview Arcturus is a late-stage global clinical messenger RNA medicines company focused on the development of infectious disease vaccines and significant opportunities within liver and respiratory rare diseases. In addition to our messenger RNA platform, our proprietary lipid nanoparticle delivery system, LUNAR®, has the potential to enable multiple nucleic acid medicines, and our proprietary self-amplifying mRNA technology (Self-Transcribing and Replicating RNA, or STARR™, technology) has the potential to provide longer-lasting RNA and sustained protein expression. We are leveraging our proprietary LUNAR platform and our nucleic acid technologies to develop and advance a pipeline of mRNA-based vaccines and therapeutics for infectious diseases and rare genetic disorders with significant unmet medical needs. Our key proprietary technology has the potential to address the major hurdles in RNA development, namely the effective and safe delivery of RNA therapeutics to disease-relevant target tissues. We believe the versatility of our platform to target multiple tissues, its compatibility with various nucleic acid therapeutics, and our expertise in developing scalable manufacturing processes puts us in a leading position to deliver on the next generation of nucleic acid medicines. During 2021, together with Vinbiocare, we advanced ARCT-154, our investigational next generation, self-amplifying mRNA-based vaccine for COVID-19, into a Phase 1/2/3 study in Vietnam, which is being funded by Vinbiocare. With Vinbiocare, we completed submission of regulatory documents to the Ministry of Health in Vietnam with respect to application for an Emergency Use Authorization for ARCT-154 (LUNAR-COV19). Our activities since inception have consisted principally of performing research and development activities, clinical research activities, general and administrative activities and raising capital to fund those efforts. Our activities are subject to significant risks and uncertainties, including failing to secure additional funding before we achieve sustainable revenues and profit from operations. As of December 31, 2021, we had an accumulated deficit of $347.5 million.  Liquidity and Capital Resources Overview Since our inception, we have funded our operations principally with proceeds from the sale of capital stock and revenues earned through collaborative agreements. At December 31, 2021, we had $370.5 million in unrestricted cash and cash equivalents. Pursuant to the Third Amendment to the Loan and Security Agreement with Western Alliance Bank (the “Loan”), the Bank agreed to make a term loan to us on October 30, 2019, in the amount of $15.0 million (the “Term Loan”). The Term Loan bears interest at a floating rate ranging from 1.25% to 2.75% above the prime rate. The amendment further provides that the Term Loan has a maturity date of October 30, 2023. In October of 2021, we entered into a Fifth Amendment to Loan Agreement which provided for a six month extension to the interest only period which moves the first principal payment to May 1, 2022.  67 Grants from the Economic Development Board of the Republic of Singapore On March 4, 2020, we were awarded a grant (“Grant 1”) from the Economic Development Board of the Republic of Singapore (the “EDB”) to support the co-development of a potential COVID-19 vaccine program with the Duke-NUS Medical School. The Grant provides for up to S$14.0 million (approximately US$10.0 million using the exchange rate at the time the grant contract was entered into) in grants to support the development of the vaccine. The Grant has been paid in full by the EDB as a result of the achievement of certain milestones related to the progress of the development of the vaccine, as set forth in the award agreement. The funds received have been recognized as contra research and development expense. The parties are in continued negotiations with respect to amendments of Grant 1. Currently, we are liable for certain expenses during the program and are also subject to certain conditions including the requirement to pay an agreed upon royalty rate to Duke-NUS on future net sales of the LUNAR-COV19 vaccine candidate developed with Duke-NUS in markets or jurisdictions outside of Singapore. On October 2, 2020, we were awarded another grant (“Grant 2”) from the Singapore EDB to support the clinical development of a potential COVID-19 vaccine (ARCT-021). The grant provides for up to S$9.3 million (approximately US$6.7 million) to support the clinical development of the vaccine candidate for costs incurred in Singapore subject to certain conditions. The grant is paid in two installments upon the achievement of certain milestones related to the progress of the development of the vaccine candidate. We received the first installment of $3.6 million in the fourth quarter of 2020. A portion of the funds received were recognized as contra research and development expense as costs were incurred during the fourth quarter of 2020. As costs were incurred during fiscal year 2021, we recognized the remaining amount of the first installment as contra expense for Grant 2. The parties are in continued negotiations with respect to amendments of Grant 2 that could include initiation of a clinical trial for a variant COVID-19 vaccine. Manufacturing Support Agreement On November 7, 2020, we entered into a Manufacturing Support Agreement (the “Support Agreement”) with the EDB. Pursuant to the Support Agreement, the EDB agreed to make a term loan (the “Singapore Loan”) of S$62.1 million, subject to the satisfaction of customary deliveries, to support the manufacture of the LUNAR-COV19 vaccine candidate (ARCT-021). The EDB has agreed to an extension of the reconciliation period to March 31, 2022 with unused funds as of such date to be subsequently returned within thirty days, subject to any further agreed upon extension of the reconciliation date. The parties are in continued negotiations with respect to amendments of the Singapore Loan terms. Under current terms, (i) we are to provide a quarterly reconciliation report within forty-five days of each financial quarter end, (ii) we will provide a projection of expenditures through March 31, 2022 followed by an audited statement of actual expenditures through March 31, 2022 by June 30, 2022, (iii) we are to provide EDB with a right of first refusal on GMP manufacturing slots of the LUNAR-COV19 vaccine candidate up to an agreed-upon maximum amount, (iv) and the obligation to repay the Singapore Loan will be secured by an interest in the raw materials and manufacturing equipment purchased by us with the funds from the Singapore Loan in form and substance satisfactory to the EDB in its sole discretion. We elected to borrow the full amount available under the Support Agreement of S$62.1 million ($46.6 million) on January 29, 2021. As of December 31, 2021, we have reported a portion of the Singapore Loan as current to reflect a potential payment in fiscal year 2022. As of December 31, 2021, we reported a portion of the Singapore Loan as current to reflect a potential principal repayment of approximately 20.9 million Singapore dollars (US $15.2 million) in fiscal year 2022 based on amounts not used toward the manufacture of ARCT-021. The Singapore Loan accrues interest at a rate of 4.5% per annum calculated on a daily basis. Subject to certain exceptions, the Singapore Loan is intended to be a limited recourse loan that will be repaid solely through a royalty payment of 10% of net sales proceeds of the LUNAR-COV19 vaccine candidate, up to the amount of the outstanding principal and interest under the Singapore Loan. However, all unpaid principal and interest under the Singapore Loan will be due and payable five years after draw date, if net sales of the LUNAR-COV19 vaccine exceed a certain minimum threshold during this five year period or we obtain clearance to sell the vaccine in specified jurisdictions. Unpaid principal and interest under the Singapore Loan will also become due and payable upon an event of default under the Support Agreement. The first vaccine sales, including the amount of net sales, shall be reported to EDB within 10 days of delivery and quarterly reports of aggregate vaccine sales, including net sales proceeds shall be provided within 30 days after quarter end. The Singapore Loan is forgivable if we have not obtained regulatory approval by the final repayment date and net sales of LUNAR-COV19 are less than $100 million. If, any portion of the Singapore Loan is required to be forgiven pursuant to the terms of the Support Agreement, the EDB has the right to take ownership of certain raw 68 materials and equipment that were purchased by us with proceeds of the Singapore Loan (the “Specified Assets”). We entered into a security agreement (the “Security Agreement”) for the benefit of the EDB to provide that repayment of the Singapore Loan and related obligations are secured by a lien on the Specified Assets. In connection with the entry into the Support Agreement, we entered into a consent agreement with Western Alliance Bank (the “Bank”) and an amendment to the Loan and Security Agreement, dated as of October 12, 2018, to exclude the Specified Assets from Western Alliance Bank’s lien on certain assets. Vinbiocare Agreement On August 2, 2021, we announced an agreement with Vinbiocare, a member of Vingroup Joint Stock Company, to establish a manufacturing facility in Vietnam for the manufacture of our investigational COVID-19 vaccine program, for sale and use within Vietnam. In addition, Vinbiocare agreed to execute a phase 1/2/3 study in Vietnam. Under the terms of the arrangement, Vinbiocare is building out a manufacturing facility in Vietnam, and we have provided to Vinbiocare access to proprietary technologies and processes for the manufacture of our investigational COVID-19 vaccine candidate. We also provided Vinbiocare with an exclusive license to manufacture the vaccines in Vietnam at the facility solely for distribution in Vietnam. The license and technology transfer applies toward drug product manufacturing but not toward mRNA drug substance manufacturing. Vinbiocare made an upfront payment of $40 million and is responsible for costs associated with the technology transfer. Vinbiocare will also pay for mRNA drug substance supplied by us and royalties on vaccines produced at the manufacturing facility. General Financial Resources A significant portion of our current cash balance of $370.5 million is expected to be utilized during fiscal year 2022 to fund (i) further progress of our COVID and FLU vaccine programs, (ii) the continued Phase 2 trial of ARCT-810, our LUNAR-OTC candidate, (iii) advances to our LUNAR-CF program toward submission of a CTA during the second half of 2022 and (iv) continued expansion of our platform and other general administrative activities. We expect to receive in the near term significant data from studies of our COVID 19 vaccine and regulatory guidance which will determine our course of action with respect to the development and commercialization of our vaccine candidate. Commercialization of ARCT-154 will require significant additional funds. We are considering additional partnering opportunities to assist in these efforts. We cannot be certain that we will identify a partner or enter into an acceptable arrangement. We will continue to evaluate our business opportunities in a surgical manner to maximize our ability to develop approved products while making most efficient use of our available resources. We entered into binding agreements with third party contract manufacturing organizations with upfront financial commitments of not less than $13 million. Our future capital requirements are difficult to forecast and will depend on many factors that are out of our control. If we are unable to maintain sufficient financial resources, our business, financial condition and results of operations will be materially and adversely affected. There can be no assurance that we will be able to obtain additional needed financing on acceptable terms or at all. Additionally, equity or debt financings may have a dilutive effect on the holdings of our existing shareholders. We expect to continue to incur additional losses for the foreseeable future, and we will need to raise additional debt or equity financing or enter into additional partnerships to fund development. Our ability to transition to profitability is dependent on identifying and developing successful mRNA drug and vaccine candidates. If we are not able to achieve planned milestones, incur costs in excess of our forecasts, or do not meet covenant requirements of our debt, we will need to reduce discretionary spending, discontinue the development of some or all of our programs, which will delay part of our development programs, all of which will have a material adverse effect on our ability to achieve our intended business objectives. 69 The following table shows a summary of our cash flows for the year ended December 31, 2021, 2020 and 2019 (in thousands): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["Cash provided by (used in):"],["Operating activities","","$","(135,043",")","","$","(42,861",")","","$","(6,445",")"],["Investing activities","","","(3,406",")","","","(1,742",")","","","(818",")"],["Financing activities","","","48,016","","","","436,145","","","","41,907"],["Net increase (decrease) in cash and restricted cash","","$","(90,433",")","","$","391,542","","","$","34,644"]] [[/GREPCENT_TABLE]] Operating Activities Our primary use of cash is to fund operating expenses, which consist mainly of research and development and general and administrative expenditures. We have incurred significant expenses which have been partially offset by cash collected through our collaboration agreements. Cash collections under the collaboration agreements can vary from year to year depending on the terms of the agreement and work performed. These changes on cash flows primarily relate to the timing of cash receipts for upfront payments, reimbursable expenses and achievement of milestones under these collaborative agreements.  Net cash used in operating activities was $135.0 million on a net loss of $203.7 million for 2021, $42.9 million on a net loss of $72.1 million for 2020 and $6.4 million on a net loss of $26.0 million for 2019. Adjustments for non-cash charges which includes share-based compensation expense and depreciation and amortization were $37.4 million for 2021, $8.1 million for 2020 and $3.6 million for 2019. Changes in working capital resulted in adjustments to operating net cash inflows of $31.2 million for 2021, $21.2 million for 2020 and $16.0 million for 2019. The significant adjustments to operating net cash inflows for 2021 were primarily due to the agreement with Vinbiocare signed in the third quarter of 2021 along with increased accrued liabilities from LUNAR-COV19 and LUNAR-OTC (ARCT-810) clinical trial activities, which expenses were incurred as discussed below. Adjustments to operating net cash inflows for 2020 were primarily due to the supply agreement with Israeli MOH signed in the third quarter of 2020 along with increased accounts payable and accrued liabilities from LUNAR-COV19  and LUNAR-OTC (ARCT-810) clinical trial activities. Lastly, adjustments to operating net cash inflows for 2019 were primarily due to the third amendment to the collaboration agreement with Ultragenyx during the second quarter of 2019 along with increased accounts payable and accrued liabilities from LUNAR-OTC (ARCT-810). Investing Activities Net cash used in investing activities of $3.4 million for 2021, $1.7 million for 2020 and $0.8 million for 2019 reflected the acquisition of property and equipment. Financing Activities Net cash provided by financing activities of $48.0 million for 2021 consisted of net proceeds from the Singapore Loan of $46.6 million, proceeds from the exercise of stock options of $0.9 million and proceeds from the issuance of common stock related to our employee stock purchase plan of $0.5 million. Net cash provided by financing activities of $436.1 million for 2020 consisted of net proceeds from the issuance of common stock in three underwritten public offerings totaling $423.8 million, net proceeds of $9.6 million from the issuance of common stock to Ultragenyx upon the exercise of its option and proceeds from the exercise of stock options of $2.7 million. Net cash provided by financing activities of $41.9 million for 2019 consisted of net proceeds from the issuance of common stock of $15.5 million to Ultragenyx, net proceeds from the issuance of common stock of $21.3 million related to public offerings, net proceeds from long-term debt of $4.9 million, and proceeds from the exercise of stock options of $0.1 million. Funding Requirements We anticipate that we will continue to generate annual net losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin commercialization of our products. As a result, we will require additional capital to fund our operations in order to support our long-term plans. We believe that our current cash position will be sufficient to meet our anticipated cash requirements through at least the next twelve months, assuming, among other things, no significant unforeseen 70 expenses, continued funding from partners at anticipated levels and our payment obligations continuing to follow the current maturity schedule under our long-term credit facility referenced in Note 7 to our consolidated financial statements in this Annual Report. We intend to seek additional capital through equity and/or debt financings, collaborative or other funding arrangements with partners or through other sources of financing. Should we seek additional financing from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or discontinue the advancement of product candidates, reduce headcount, liquidate our assets, file for bankruptcy, reorganize, merge with another entity, or cease operations. Our future funding requirements are difficult to forecast and will depend on many factors, including the following: [[GREPCENT_TABLE]] [["","\u2022","the development of our LUNAR-COV19 and LUNAR-FLU vaccine candidates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the achievement of milestones under our strategic alliance agreements;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","maintaining and/or expanding our manufacturing network and capabilities;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the terms and timing of any other strategic alliance, licensing and other arrangements that we may establish;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the initiation, progress, timing and completion of preclinical studies and clinical trials for our product candidates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the number and characteristics of product candidates that we pursue;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the outcome, timing and cost of regulatory approvals;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","delays that may be caused by changing regulatory requirements;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the cost and timing of hiring new employees to support our continued growth;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the costs and timing of procuring clinical and commercial supplies of our product candidates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the costs and timing of establishing sales, marketing and distribution capabilities;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the costs associated with legal proceedings;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the costs associated with potential litigation related to collaboration agreements; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","the extent to which we acquire or invest in businesses, products or technologies."]] [[/GREPCENT_TABLE]] Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements included in this Annual Report. Our historical results of operations and the year-to-year comparisons of our results of operations that follow are not necessarily indicative of future results. Revenues We enter into arrangements with pharmaceutical and biotechnology partners and government agencies that may contain upfront payments, license fees for research and development arrangements, research and development funding, milestone payments, option exercise and exclusivity fees and royalties on future sales. The following table summarizes our total revenues for the periods indicated (in thousands): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["Revenue","","$","12,359","","","$","9,539","","","$","20,789"]] [[/GREPCENT_TABLE]] 71 Revenue increased by $2.8 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase in revenue primarily relates to $4.4 million of increased revenue related to the agreement with Vinbiocare executed in the third quarter of 2021. The overall increase in revenue was primarily offset by a decrease in revenue of $1.6 million from our existing collaboration partners. Revenue decreased by $11.3 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019. The decrease in revenue primarily relates to (i) $5.6 million of decreased revenue from reduced reimbursements associated with the CureVac co-development agreement that terminated in the second quarter of 2019, (ii) a decrease in one-time sublicense revenue from Synthetic Genomics as we recognized sublicense revenue of $3.3 million during the second quarter of 2019, (iii) a reduction of $1.9 million in revenue recognized related to the Ultragenyx Agreement, as we recorded a large amount of upfront payment amortization upon the execution of the Ultragenyx Third Amendment during the second quarter of 2019 and also recognized fewer research and development expense reimbursements related to the Ultragenyx Agreement during 2020, and (iv) lower research and development expense reimbursements recognized in 2020 related to other collaboration agreements, including with Providence Therapeutics and Takeda. The decrease in revenue was partially offset by increased revenue recognition related to the Janssen agreement and other collaboration agreements. Operating Expenses Our operating expenses consist of research and development and general and administrative expenses. [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["Operating expenses:"],["Research and development, net","","$","173,760","","","$","57,846","","","$","33,640"],["General and administrative","","","41,451","","","","23,217","","","","12,662"],["Total","","$","215,211","","","$","81,063","","","$","46,302"]] [[/GREPCENT_TABLE]] The following table presents our total research and development expenses by category: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["External pipeline development expenses:"],["LUNAR-COV19, net","","$","100,626","","","$","20,896","","","$","\u2014"],["LUNAR-CF (ARCT-032), net","","","4,761","","","","4,405","","","","813"],["LUNAR-OTC (ARCT-810)","","","7,296","","","","13,008","","","","15,616"],["Discovery technologies","","","20,279","","","","1,748","","","","3,937"],["External platform development expenses:"],["Partnered discovery technologies","","","812","","","","1,515","","","","1,894"],["Total development expenses","","$","133,774","","","$","41,572","","","$","22,260"],["Personnel related expenses","","$","34,861","","","$","12,824","","","$","9,005"],["Facilities and equipment expenses","","","5,125","","","","3,450","","","","2,375"],["Total research and development expenses, net","","$","173,760","","","$","57,846","","","$","33,640"]] [[/GREPCENT_TABLE]] Research and Development Expenses, net Our research and development expenses consist primarily of external manufacturing costs, in-vivo research studies and clinical trials performed by contract research organizations, clinical and regulatory consultants, personnel related expenses and laboratory supplies related to conducting research and development activities. Costs to acquire and manufacture pre-launch inventory, mRNA supply for preclinical studies and clinical trials are recognized and included in external pipeline development expenses for the specific program. LUNAR-COV19 expenses increased by $79.7 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020. Expenses incurred were partially offset with funds awarded by the Singapore 72 EDB. The LUNAR-COV19 program did not commence until late in the first quarter of 2020 and is now in late-stage clinical trials. LUNAR-CF expenses were $4.8 million in the year ended December 31, 2021, $4.4 million in the year ended December 31, 2020 and $0.8 million in the year ended December 31, 2019. Expenses incurred were partially offset with funds awarded by the CFF. The increase in LUNAR-CF expenses was due primarily to increased research and development cost incurred in association with the amendment to the CFF Agreement executed in July 2019, and we expect that our development efforts and associated costs will increase over the next several years as the LUNAR-CF program moves toward expected CTA submission in the second half of 2022. LUNAR-OTC expenses were $7.3 million for the year ended December 31, 2021, $13.0 million for the year ended December 31, 2020 and $15.6 million for the year ended December 31, 2019. The decreases for each year are related to slower than expected recruiting for the ARCT-810 clinical trial caused in part by the ongoing Covid environment. Discovery technologies represents our efforts to expand our product pipeline and are expected to increase in the near future. Discovery technology expenses were $20.3 million in the year ended December 31, 2021, $1.7 million in the year ended December 31, 2020 and $3.9 million in the year ended December 31, 2019. The increase in 2021 when compared to 2020 is primarily due to increased investment in new capabilities. Further, in the first quarter of 2021, we acquired an exclusive license from Alexion Pharmaceuticals to certain intellectual property for approximately $5.0 million of our common stock, which we expensed in 2021. The decrease in discovery technology expenses from 2019 to 2020 was due to focusing our efforts on the advancement of our LUNAR-OTC and LUNAR-COV19 programs. Partnered discovery technologies expenses were $0.8 million in the year ended December 31, 2021, $1.5 million in the year ended December 31, 2020 and $1.9 million in the year ended December 31, 2019. The decreases in partnered discovery technologies expenses from 2020 to 2021 and 2019 to 2020 were primarily caused by decreased activity in rare disease targets and a greater focus on vaccine technology. We expect partnered discovery technologies expenses to fluctuate based on the needs of our collaboration partners.  Personnel related expenses, net of funds received from CFF and the Singapore EDB, were $34.9 million in the year ended December 31, 2021, $12.8 million in the year ended December 31, 2020 and $9.0 million in the year ended December 31, 2019. The increases were associated with increased headcount costs necessary to advance our external pipeline, platform and clinical trial efforts as well as increased share-based compensation expense. Facilities and equipment expenses were $5.1 million in the year ended December 31, 2021, $3.5 million in the year ended December 31, 2020 and $2.4 million in the year ended December 31, 2019. The increases resulted primarily from higher rent and related costs associated with an additional lease that we entered into in February 2020. We expect that the facility and equipment expenses will increase in 2022 as we have added an additional facility in the second quarter of 2022 in order to support our research and development activities. 73 General and Administrative Expenses General and administrative expenses consist primarily of salaries and related benefits for our executive, administrative and accounting functions and professional service fees for legal and accounting services as well as other general and administrative expenses. General and administrative expenses were $41.5 million in the year ended December 31, 2021, $23.2 million in the year ended December 31, 2020 and $12.7 million in the year ended December 31, 2019. The increases resulted primarily from personnel expense due to increased headcount and increased share-based compensation expense. We expect general and administrative expenses to increase in 2022 as we expand our headcount, facilities and professional services to execute our business plan. Finance income (expense), net [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in thousands)","","2021","","","2020","","","2019"],["Finance income (expense), net:"],["Interest income","","$","753","","","$","470","","","$","408"],["Interest expense","","","(2,674",")","","","(831",")","","","(854",")"],["Total","","$","(1,921",")","","$","(361",")","","$","(446",")"]] [[/GREPCENT_TABLE]] Interest income is generated on cash and cash equivalents. The increases in interest income from 2020 to 2021 and from 2019 to 2020 resulted from increased interest on bank deposits due to higher cash balances, partially offset by lower interest rates earned. Interest expense during the year ended December 31, 2021 was incurred in conjunction with our Loan and Security Agreement with Western Alliance Bank and the Singapore Loan. The increase in interest expense during 2021 as compared to the prior year period was primarily a result of additional accrued interest expense related to the Singapore Loan that was funded in January 2021. Interest expense was relatively flat for the year ended 2020 as compared to 2019 and was related to the Loan and Security Agreement with Western Alliance Bank. Critical Accounting Policies and Estimates We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). As such, we make certain estimates, judgments and assumptions that we believe are reasonable, based upon information available to us. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact our results of operations and financial condition. We describe our significant accounting policies more fully in Note 2 to our consolidated financial statements for the year ended December 31, 2021. In the following paragraphs, we describe the specific risks associated with these critical accounting policies and we caution that future events may not reflect exactly as one may expect, and that best estimates may require adjustment. The following are our significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results.  Revenue Recognition Research and development revenue under collaborative agreements We recognize research and development revenue from several collaboration agreements. Our collaboration agreements typically contain promised goods and services, including technology licenses or options to obtain technology licenses, research and development services, and manufacturing services. Upon entering into a collaboration agreement, we are required to make the following judgments: Identifying the performance obligations contained in the agreement Our assessment of what constitutes a separate performance obligation requires us to apply judgment. Specifically, we are required to identify which goods and services we are required to provide under the contract are distinct, if any. 74 Determining the transaction price, including any variable consideration To determine the transaction price, we review the amount of consideration we are eligible to earn under the agreement. We do not typically include any payments we may receive in the future in our initial transaction price since the payments are typically not probable because they are contingent upon certain future events. We are required to reassess the total transaction price at each reporting period to determine if we should include additional payments that have become probable in the transaction price. Allocating the transaction price to each of our performance obligations If we were to allocate the transaction price to more than one performance obligation, we would make estimates of the relative stand-alone selling price of each performance obligation, as it is not typical for us to sell our goods or services on a stand-alone basis. The estimate of the relative stand-alone selling price would require us to make significant judgments. To date, we have not entered into a collaboration agreement with more than one performance obligation. The research and development revenue we recognize each period is comprised of several types of revenue, including amortization from upfront payments, milestone payments, option exclusivity fees and other services. Each of these types of revenue require us to make various judgments and estimates. Amortization from Upfront Payments For certain agreements, we recognize revenue from the amortization of upfront payments as we perform research and development, technology transfer and consulting services. We use an input method to estimate the amount of revenue to recognize each period. This method requires us to make estimates of the total costs we expect to incur in order to complete our promised research and development services or the total length of time it will take us to complete our promised research and development services. If we change our estimates, we may have to adjust our revenue. Milestone Payments When recognizing revenue related to milestone payments, we typically judge and estimate whether the milestone payment is probable (discussed in detail above under “Determining the transaction price, including any variable consideration”). Research and Development Expenses, Including Clinical Trial Accruals/Expenses Research and development costs consist of salaries and benefits, including related stock-based compensation, laboratory supplies and facility costs, as well as fees paid to other entities that conduct certain research and development activities on our behalf, such as clinical research organizations, or CROs, and contract manufacturing organizations, or CMOs. Research and development costs are expensed as incurred. 75 Clinical trial expenses are a significant component of research and development expenses, and we outsource a significant portion of these clinical trial activities to third parties. Third-party clinical trial expenses include investigator fees, site and patient costs, CRO costs, and costs for central laboratory testing and data management. The accrual for site and patient costs includes inputs such as estimates of patient enrollment, patient cycles incurred, clinical site activations, and other pass-through costs. These inputs are required to be estimated due to a lag in receiving the actual clinical information from third parties. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the balance sheets as prepaid assets or accrued expenses. These third-party agreements are generally cancelable, and related costs are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for goods or services that will be used or rendered for future research and development activities are recorded as a prepaid asset and recognized as expense as the related goods are delivered or the related services are performed. When evaluating the adequacy of the accrued expenses, we analyze progress of the studies, including the phase or completion of events, invoices received and contracted costs. We make estimates of our accrued balances as of each balance sheet date based on facts and circumstances known to our internal personnel at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made. Our historical clinical accrual estimates have not been materially different from our actual costs. Off-balance sheet arrangements None.