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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2022

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from         to        

Sigilon Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

001-39746

47-4005543

(State or other jurisdiction of
incorporation or organization)

(Commission File No.)

(I.R.S. Employer
Identification No.)

100 Binney Street, Suite 600

Cambridge, MA 02142

(Address, including zip code, of registrant’s principal executive offices)

(617) 336-7540

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value per share

SGTX

The Nasdaq Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of May 2, 2022, there were 32,399,257 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding

Table of Contents

Sigilon Therapeutics, Inc.

TABLE OF CONTENTS

Page

PART I - Financial Information

Item 1.

Financial Statements (Unaudited)

5

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021

5

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021

6

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended March 31, 2022 and 2021

7

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021

8

Notes to Condensed Consolidated Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures About Market and Risk

31

Item 4.

Controls and Procedures

32

PART II - Other Information

32

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

90

Item 3.

Defaults upon Senior Securities

90

Item 4.

Mine Safety Disclosures

90

Item 5.

Other Information

90

Item 6.

Exhibits

90

Signatures

92

S

2

Table of Contents

RISK FACTORS SUMMARY

Our business is subject to a number of risks, including risks that may adversely affect our business, results of operations, cash flows, and prospects. These risks are discussed more fully in “Item 1.A Risk Factors” and include, but are not limited to, risks related to:

We have incurred significant losses since inception. We expect to incur losses for the foreseeable future and may never achieve or maintain profitability.
If we fail to achieve the expected financial and operational benefits of our corporate restructuring, our business and financial results may be harmed.
The results of our investigation of the preliminary results of our Phase 1/2 clinical trial of SIG-001 in Hemophilia A or a failure of SIG-005 in clinical development could adversely affect our business and may require us to discontinue or delay development of other product candidates, which are all based on the same SLTx platform.
The SLTx platform consists of novel technologies that are not yet clinically validated for human therapeutic use. The approaches we are taking to discover and develop novel therapeutics are unproven and may never lead to marketable products.
We may not be successful in our efforts to identify and develop product candidates. If these efforts are unsuccessful, we may never become a commercial stage company or generate any revenues.
We are early in our development efforts. It will be many years before we or our collaborators commercialize a product candidate, if ever.
We only have preliminary data from the patients dosed with SIG-001 and no results from our product candidates in clinical trials and any favorable preclinical results are not predictive of results that may be observed in future clinical trials.
Our product candidates are composed of engineered human cell lines, encapsulated in a biocompatible matrix sphere. To date, there have been no completed human clinical trials for product candidates arising from our SLTx platform or consisting of our cell or sphere technologies. There may be SAEs in addition to the SAE reported in our Phase 1/2 clinical trial of SIG-001 in Hemophilia A, undesirable side effects related to either component of our product candidates, or limited efficacy of product candidates arising from our SLTx platform.
If clinical trials of our current and future product candidates fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidates.
If we are unable to obtain and maintain patent and other intellectual property protection for SIG-001, SIG-005 or any other product candidates and for our SLTx platform, or if the scope of the patent and other intellectual property protection obtained is not sufficiently broad, our SLTx platform may be adversely affected.

3

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, forward-looking statements include terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplate," "believe," "estimate," "predict," "potential" or "continue" or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. Forward-looking statements include, but are not limited to, statements concerning:

the initiation, timing, enrollment, progress and results of our research and development programs, preclinical studies and clinical trials, the timing and enrollment of our clinical trial for SIG-005 and the submission or approval of INDs or CTAs for our other product candidates, including SIG-002;
our ability to advance any product candidates that we may develop and successfully complete any clinical studies, including the manufacture of any such product candidates;
our plan to develop next generation product candidates designed to penetrate the blood brain barrier;
our ability to leverage our initial programs to develop additional product candidates using the SLTx platform and our ability to leverage the modularity of our SLTx platform across our lysosomal disease programs;
the impact of the COVID-19 pandemic on our business operations, including our research and development programs, preclinical studies and clinical trials;
our ability to treat, identify or otherwise expand or access the target populations of our programs;
our ability to identify and enter into future license agreements and collaborations; and
estimates of our expenses, capital requirements and needs for additional financing.

There may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q. We cannot guarantee future results, levels of activity, performance or achievements.

4

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Sigilon Therapeutics, Inc.

Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except share and per share amounts)

March 31, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

64,487

$

107,143

Marketable securities

38,618

16,213

Accounts receivable (inclusive of $23 and $23 from a related party at March 31, 2022 and December 31, 2021, respectively)

 

62

 

59

Prepaid expenses and other current assets

 

6,234

 

2,729

Restricted cash—current

 

250

 

250

Total current assets

 

109,651

 

126,394

Property and equipment, net

 

3,689

 

3,994

Right‑of‑use assets

 

11,708

 

12,863

Restricted cash

 

1,118

 

1,118

Total assets

$

126,166

$

144,369

Liabilities and stockholders’ equity (deficit)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,040

$

2,344

Accrued expenses and other current liabilities

 

8,060

 

8,998

Lease liabilities, current portion

 

4,407

 

4,845

Current portion of long‑term debt

 

3,333

 

1,667

Deferred revenue from related party, current portion

 

19,206

 

17,034

Total current liabilities

 

37,046

 

34,888

Deferred revenue from related party, net of current portion

 

 

5,333

Lease liability, net of current portion

 

7,721

 

8,577

Long‑term debt, net of discount and current portion

 

16,811

 

18,411

Total liabilities

$

61,578

$

67,209

Commitments and contingencies (Note 9)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, par value $0.001 per share; 175,000,000 shares authorized at March 31, 2022 and December 31, 2021; 32,399,257 and 32,359,895 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

32

 

32

Preferred stock, par value $0.001 per share; 25,000,000 shares authorized at March 31, 2022 and December 31, 2021; no shares issued and outstanding at March 31, 2022 and December 31, 2021

 

 

Additional paid‑in capital

 

292,043

 

290,377

Accumulated other comprehensive income

(389)

(10)

Accumulated deficit

 

(227,098)

 

(213,239)

Total stockholders’ equity

 

64,588

 

77,160

Total liabilities and stockholders’ equity

$

126,166

$

144,369

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

Sigilon Therapeutics, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited, in thousands, except share and per share amounts)

Three Months Ended March 31, 

    

2022

    

2021

Revenue

 

  

 

  

Collaboration revenue (inclusive of $3,161 and $2,932 from a related party for the three months ended March 31, 2022 and 2021, respectively)

$

3,165

$

2,958

Operating expenses:

 

 

Research and development

 

11,618

 

15,985

General and administrative

5,024

5,540

Total operating expenses

 

16,642

 

21,525

Loss from operations

 

(13,477)

 

(18,567)

Other income (expense), net:

 

  

 

  

Interest income

 

64

86

Interest expense

 

(491)

(488)

Other income (expense)

 

45

(4)

Total other expense, net

 

(382)

 

(406)

Net loss

$

(13,859)

$

(18,973)

Net loss per share—basic and diluted

$

(0.43)

$

(0.60)

Weighted average common stock outstanding—basic and diluted

 

32,360,786

31,487,710

Other comprehensive loss

Unrealized loss on marketable debt securities

(379)

Total other comprehensive loss

(379)

Total comprehensive loss

$

(14,238)

$

(18,973)

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

Sigilon Therapeutics, Inc.

Condensed Consolidated Statements of

Stock and Stockholders’ Equity (Deficit)

(Unaudited, in thousands, except share amounts)

    

    

    

Accumulated

    

    

Total

Additional

Other

Stockholders’

Common Stock

PaidIn

Comprehensive

Accumulated

Equity

    

Shares

    

Amount

    

Capital

    

Loss

Deficit

(Deficit)

Balances at December 31, 2021

32,359,895

$

32

$

290,377

$

(10)

$

(213,239)

$

77,160

Issuance of common stock upon exercise of stock options

 

833

1

1

Issuance of ESPP shares

38,529

47

47

Stock‑based compensation expense

 

1,618

1,618

Unrealized loss on marketable debt securities

(379)

(379)

Net loss

 

(13,859)

(13,859)

Balances at March 31, 2022

 

32,399,257

$

32

$

292,043

$

(389)

$

(227,098)

$

64,588

Balances at December 31, 2020

 

31,464,989

$

31

$

282,053

$

$

(135,928)

$

146,156

Issuance of common stock upon exercise of stock options

 

36,963

1

144

 

145

Stock‑based compensation expense

 

1,704

 

1,704

Net loss

 

(18,973)

 

(18,973)

Balances at March 31, 2021

 

31,501,952

$

32

$

283,901

$

$

(154,901)

$

129,032

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

Table of Contents

Sigilon Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Three Months Ended March 31, 

     

2022

     

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(13,859)

 

$

(18,973)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

Depreciation and amortization expense

 

316

 

247

Gain on disposal of fixed assets

(20)

Stock‑based compensation expense

 

1,618

 

1,704

Non‑cash lease expense

 

1,223

 

1,197

Non‑cash interest expense

 

66

 

67

Amortization of premium on marketable securities

35

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

(3)

 

37

Prepaid expenses and other current assets

 

(3,336)

 

(2,329)

Accounts payable

 

(186)

 

578

Accrued expenses and other current liabilities

 

(819)

 

(991)

Lease liabilities

 

(1,362)

 

(1,292)

Deferred revenue

 

(3,161)

 

(2,918)

Net cash used in operating activities

 

(19,488)

 

(22,673)

Cash flows from investing activities:

 

  

 

  

Purchases of marketable securities

(22,819)

Purchase of property and equipment

 

(397)

 

(290)

Net cash used in investing activities

 

(23,216)

 

(290)

Cash flows from financing activities:

 

  

 

  

Payments of deferred offering costs

 

(622)

Proceeds from employee equity plans

 

48

145

Net cash provided by (used in) financing activities

 

48

 

(477)

Net decrease in cash, cash equivalents and restricted cash

 

(42,656)

 

(23,440)

Cash, cash equivalents and restricted cash at beginning of period

 

108,511

 

203,422

Cash, cash equivalents and restricted cash at end of period

$

65,855

 

$

179,982

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

420

 

$

420

Supplemental disclosures of noncash investing and financing activities:

 

 

Right-of-use assets obtained in exchange for lease liabilities

$

68

 

$

564

Receivable for proceeds from the sale of property and equipment in prepaid expenses and other current assets

$

169

 

$

Purchases of property and equipment included in accounts payable and accrued expenses

$

85

 

$

108

The accompanying notes are an integral part of these condensed consolidated financial statements.

8

Table of Contents

Sigilon Therapeutics, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of the Business and Basis of Presentation

Sigilon Therapeutics, Inc. (the “Company” or “Sigilon”) is a biopharmaceutical company with a platform of biomedical technologies and cell therapies created to avoid host detection and foreign body responses with a goal of providing functional cures to patients with chronic diseases. The Company was incorporated on May 14, 2015 under the laws of the State of Delaware.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, the successful completion of research and development, development by competitors of new technological innovations, dependence on key personnel, protection of technology, compliance with government regulations, and the ability to secure additional capital to fund operations and commercial success of its product candidates.

Since its inception, the Company has devoted substantially all of its efforts to raising capital, obtaining financing, and incurring research and development costs related to advancing its biomedical platform. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with (i) U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and (ii) the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, such financial statements do not include all the information and footnotes required by U.S. GAAP for a complete set of financial statements. In the opinion of management, the Unaudited Condensed Financial Statements include all adjustments, consisting of normal recurring accruals and other adjustments, considered necessary for a fair statement of the Company’s financial position, results of operations, stockholders’ equity (deficit) and cash flows as of and for the periods presented. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2021 was derived from the Company’s audited financial statements at that date but does not include all of the footnote disclosures required by U.S. GAAP.

The Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited financial statements and related notes included in its Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”). The Company’s significant accounting policies are described in Note 2 to the Notes to Financial Statements in the 2021 Form 10-K and are updated, as necessary, in subsequent Form 10-Q filings.

Going Concern

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

From its inception through March 31, 2022, the Company has funded its operations primarily with proceeds from its IPO, sales of convertible preferred stock, payments received under its collaboration agreement and proceeds from borrowings under loan and security agreements. The Company has incurred recurring losses since inception, including net losses of $13.9 million for the three months ended March 31, 2022 and $77.3 million for the year ended December 31, 2021. In addition, as of March 31, 2022, the Company had an accumulated deficit of $227.1 million. The Company expects to generate significant losses and negative cash flows from operations for the foreseeable future.

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Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $103.1 million as of March 31, 2022 will be sufficient to fund its anticipated level of operations, capital expenditures and satisfy debt repayments for a period of at least 12 months from the issuance date of this Quarterly Report. The Company expects to generate operating losses for the foreseeable future. Accordingly, the Company will seek additional funding through equity financings, debt financing, or additional collaboration agreements. If the Company is unable to raise additional funds through equity financing, debt financings or additional collaboration agreements the Company may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop and market products or product candidates that the Company would otherwise prefer to develop and market itself.

Impact of COVID-19

The COVID-19 pandemic has impacted and may continue to impact the clinical sites and startup activities for the Company’s Phase 1/2 clinical trials, including the operations of the Company’s third-party manufacturing and logistics providers, which has disrupted its clinical supply chain or the availability or cost of materials, and it may affect the Company’s ability to timely complete its clinical trials and delay the initiation and/or enrollment of any future clinical trials, disrupt regulatory activities or have other adverse effects on its business and operations.

The Company is monitoring the potential impact of COVID-19 on its business and financial statements. The effects of the public health directives may negatively impact productivity, disrupt its business and delay clinical programs and timelines and future clinical trials, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on its ability to conduct business in the ordinary course. These and similar, and perhaps more severe, disruptions in the Company’s operations could negatively impact business, results of operations and financial condition, including its ability to obtain financing.

To date, the Company has not incurred impairment losses in the carrying values of its assets as a result of the COVID-19 pandemic and are not aware of any specific related event or circumstance that would require the Company to revise its estimates reflected in financial statements.

The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business and prospects. The extent to which the COVID-19 pandemic will directly or indirectly impact its business, results of operations, financial condition and liquidity, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, and the duration and intensity of the related effects.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, research and development expenses, the valuations of common stock, stock-based awards and the preferred stock warrant liability. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates as there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results may differ from those estimates or assumptions.

Concentration of Credit Risk and of Significant Suppliers

The financial instruments that potentially subject the Company to concentrations of credit risk are cash and accounts receivable. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. As of March 31, 2022 and December 31, 2021, all of the Company’s accounts receivable were related to two customers. As of March 31, 2022 and December 31, 2021, 36% and 39%,

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respectively, of the Company’s total receivables were related to the Company’s collaboration agreements with Eli Lilly and Company (Note 8).

The Company is dependent on third-party manufacturers to supply certain products for research and development activities in its programs. The Company currently has a supplier of certain raw materials that would be considered a sole supplier. If the Company cannot access additional suppliers, its programs could be adversely affected by an interruption in the availability of these raw materials.

Net Income (Loss) per Share

The Company only has one class of shares outstanding and basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, including potential dilutive common shares assuming the dilutive effect of outstanding stock awards. For periods in which the Company reports a net loss, diluted net loss per common share is the same as basic net loss per common share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 362): Measurement of Credit Losses on Financial Statements (“ASU 2016-13”). The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The targeted transition relief standard allows filers an option to irrevocably elect the fair value option of ASC 825-10, Financial Instruments-Overall, applied on an instrument-by-instrument basis for eligible instruments. For public entities that are Securities and Exchange Commission (“SEC”) filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted and the Company adopted ASU 2016-13 on January 1, 2022. The adoption of this standard did not have a material impact on its financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify the accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard will be effective for public business entities, for fiscal years beginning after December 15, 2020, and for all other entities, for fiscal years beginning after December 15, 2021 and the Company adopted ASU 2016-13 on January 1, 2022. The adoption of ASU 2019-12 did not have a material impact on the Company’s financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform if contract modifications are made on or before December 31, 2022. The amendments in this update are effective for all entities as of March 12, 2020 and do not apply to contract modifications made, and hedging relationships entered into or evaluated, after December 31, 2022. The Company is currently evaluating the potential impact ASU 2020-04 may have on its financial statements.

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3. Fair Value Measurements and marketable securities

Value Measurements

The following tables present information about the Company’s financial assets that have been measured at fair value as of March 31, 2021 and indicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. During the three months ended March 31, 2021, there were no transfers between Level 1 and Level 2 financial assets.

The following table summarizes the Company’s cash equivalents and marketable securities as of March 31, 2022 and December 31, 2021 (in thousands):

Fair value measurements as of

March 31, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash equivalents

 

  

 

  

 

  

 

  

Money market funds

$

28,897

$

$

$

28,897

Commercial paper

20,158

20,158

U.S. Treasuries

4,999

4,999

Total cash equivalents

$

28,897

$

25,157

$

$

54,054

Marketable securities

Corporate bonds

$

$

25,735

$

$

25,735

Commercial paper

10,654

10,654

U.S. Government Agencies

1,235

1,235

U.S. Treasuries

994

994

Total marketable securities

$

$

38,618

$

$

38,618

Total

$

28,897

$

63,775

$

$

92,672

Fair value measurements as of

December 31, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash equivalents

Money market funds

$

50,847

$

$

$

50,847

Commercial paper

25,995

25,995

Corporate bonds

1,000

1,000

Total cash equivalents

$

50,847

$

26,995

$

$

77,842

Marketable securities

Corporate bonds

$

$

10,238

$

$

10,238

Commercial paper

 

5,975

5,975

Total marketable securities

$

$

16,213

$

$

16,213

Total

$

50,847

$

43,208

$

$

94,055

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Marketable Securities

The following tables summarizes the Company’s available-for-sale marketable debt securities as of March 31, 2022 and December 31, 2021 (in thousands):

Fair value measurements as of

March 31, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

Credit

    

Cost

    

Gains

    

Losses

    

Losses

    

Total

Corporate bonds

$

26,052

$

$

(317)

$

$

25,735

Commercial paper

10,704

(50)

10,654

U.S. Treasuries

1,248

(13)

1,235

U.S. Government Agencies

998

(4)

994

Total

$

39,002

$

$

(384)

$

$

38,618

Fair value measurements as of

December 31, 2021

Gross

Gross

Amortized

Unrealized

Unrealized

    

Cost

    

Gains

    

Losses

    

Total

Commercial paper

$

10,244

$

$

(6)

$

10,238

Corporate bonds

5,977

(2)

5,975

Total

$

16,221

$

$

(8)

$

16,213

No declines in value were deemed to be other than temporary during the three months ended March 31, 2022 and the year ended December 31, 2021.

The following table summarizes the Company’s available-for-sale marketable debt securities by contractual maturity, as of March 31, 2022 and December 31, 2021 (in thousands):

March 31, 

December 31, 

2022

2021

Maturities in one year or less

$

23,459

$

9,004

Maturities between one and two years

 

15,159

 

7,209

Total

$

38,618

$

16,213

As of March 31, 2022 and December 31, 2020 the Company did not have any other financial assets and liabilities that were measured at fair value on a recurring basis.

The carrying value of the Company’s long-term debt approximates its fair value at March, 31 2022 and December 31, 2021 because the debt bears interest at a variable market rate and the Company’s credit risk has not materially changed since the inception of the agreement.

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4. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

March 31, 

December 31, 

    

2022

2021

Laboratory equipment

$

6,301

$

6,297

Leasehold improvements

 

78

 

78

Furniture and fixtures

 

620

 

620

Computers and software

 

141

 

163

 

7,140

 

7,158

Less: Accumulated depreciation and amortization

 

(3,451)

 

(3,164)

Total property and equipment, net

$

3,689

$

3,994

Depreciation and amortization expense for the three months ended March 31, 2022 and 2021 was $0.3 million and $0.2 million, respectively.

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

March 31, 

December 31, 

    

2022

    

2021

Employee compensation and benefits

$

1,154

$

3,071

External research and development costs

 

6,127

 

5,056

Legal and professional fees

 

593

 

656

Other

 

186

 

215

Total accrued expenses and other current liabilities

$

8,060

$

8,998

6. Debt

The following discussion of the Company’s debt should be read in conjunction with Note 8 to the Notes to the Consolidated Financial Statements in the 2021 Form 10-K.

As of March 31, 2022 and December 31, 2021, long-term debt consisted of the following (in thousands):

    

March 31, 

December 31, 

    

2022

2021

Principal amount of long‑term debt

$

20,000

$

20,000

Less: Current portion of long‑term debt

(3,333)

 

(1,667)

Long‑term debt, net of current portion

 

16,667

 

18,333

Final debt payment liability

700

700

Debt discount, net of accretion

 

(556)

 

(622)

Long‑term debt, net of discount and current portion

$

16,811

$

18,411

As of March 31, 2022 and December 31, 2021, the interest rate applicable to borrowings under the 2020 Credit Facility was 8.47% and 8.40%, respectively.

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The estimated future principal payments due were as follows (in thousands):

March 31, 

    

2022

2022 (Remaining nine months)

$

1,666

2023

 

6,667

2024

 

6,667

2025

5,000

2026

$

20,000

As of March 31, 2022, the Company was in full compliance with all financial covenants of the Loan Agreement.

7. Stock Based Compensation

The Company uses stock options to provide long-term incentives to its employees, non-employee directors and certain consultants. The Company has two equity compensation plans under which awards are currently authorized for issuance: the 2020 Employee Stock Purchase Plan and the 2020 Equity Incentive Plan. The Company also has outstanding stock-based awards under its 2016 Equity Incentive Plan but is no longer granting awards under this plan. As of March 31, 2022, there were 882,827 shares available for issuance under the 2020 Employee Stock Purchase Plan and 1,725,763 shares available for issuance under the 2020 Equity Incentive Plan.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. The Company was a private company prior to the initial public offering and lacked company-specific historical and implied volatility information for its stock. Therefore, it estimates its expected stock price volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield of 0% is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted to employees and directors:

    

Three months ended

 

March 31, 

 

2022

2021

 

Risk-free interest rate

 

1.61

%  

 

0.66

%

Expected dividend yield

 

0.00

%  

 

0.00

%

Expected term (in years)

 

6.0

 

6.1

Expected volatility

 

84.28

%  

 

78.39

%

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Stock Option Activity

The following table summarizes the Company’s stock option activity since December 31, 2021:

    

    

    

Weighted

    

average

Weighted

remaining

Aggregate

Number of

average

contractual term

intrinsic value

options

exercise price

(in years)

(in thousands)

Balances at December 31, 2021

 

3,138,646

$

10.74

7.6

$

328

Options granted

 

2,250,674

 

2.39

 

Options cancelled

 

(385,026)

 

7.11

 

Options exercised

 

(833)

 

0.57

Outstanding and expected to vest at March 31, 2022

5,003,461

7.27

8.4

94

Exercisable at March 31, 2022

 

1,718,102

$

6.83

 

6.6

$

94

The aggregate intrinsic value of options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those options that had exercise prices lower than the fair value of the Company’s common stock.

The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2022 and 2021 were less than $0.1 million and $1.0 million, respectively. The weighted average grant date fair value of stock options during the three months ended March 31, 2022 and 2021 were $1.69 and $26.64, respectively.

Restricted Stock Units

The Company has granted restricted stock units with time-based vesting conditions to employees. The restricted stock units primarily vest over 3 years from the grant date. The Company values restricted stock units on the grant-date using the market price of the Company’s common stock.

The following table summarizes restricted stock unit activity since December 31, 2021:

    

    

Weighted

 average grant

Shares

date fair value

Unvested shares as of December 31, 2021

 

275,400

$

5.57

Forfeited

 

(53,500)

 

5.60

Unvested shares as of March 31, 2022

221,900

$

5.56

Stock-based Compensation Expense

Stock-based compensation expense related to stock options and restricted stock units was classified in the statement of operations and comprehensive loss as follows (in thousands):

Three months ended

March 31, 

    

2022

    

2021

Research and development

$

516

$

839

General and administrative

 

1,102

 

865

$

1,618

$

1,704

As of March 31, 2022, total unrecognized stock-based compensation expense related to unvested stock-based awards and units was $16.2 million, which is expected to be recognized over a weighted average period of 2.6 years.

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8. License and Collaboration Agreement

Lilly License and Collaboration Agreement

On April 2, 2018, the Company entered into a License and Collaboration Agreement with Lilly (the “2018 Lilly Agreement”). Under the 2018 Lilly Agreement, the Company granted Lilly an exclusive worldwide, royalty-bearing license, including the right to grant sublicenses, to the Company’s encapsulation technology applied to islet cells. The Company is responsible for research and development activities, including supply and manufacturing activities, through investigational new drug (“IND”) filing readiness for the first product candidate, including costs up to $47.5 million and certain supply and manufacturing of products and materials in Phase 1 clinical trials and for clinical and commercial use following Phase 1 clinical trials; provided, however, that, pursuant to an amendment to the 2018 Lilly Agreement entered in May 2022, Lilly may take on certain research and development activities, at its own cost and expense, including supply and manufacturing activities. In addition, Lilly will be responsible for development and commercialization of any licensed product post-IND filing readiness and research and development costs for the IND product candidate above the $47.5 million cost threshold. Lilly is also responsible for all research, development and commercialization related to any subsequent product candidate. The parties are collaborating with the intent of developing encapsulated cell therapies for the potential treatment of type 1 diabetes. The activities under the agreement are governed by a joint research committee (“JRC”), which meets quarterly and consists of at least three members each from the Company and Lilly.

Under the 2018 Lilly Agreement, Lilly was obligated to pay the Company a one-time, non-refundable and non-creditable license issuance fee of $62.5 million. Lilly is also obligated to make aggregate milestone payments to the Company of up to $165.0 million upon achievement of certain regulatory milestones for the first licensed product and regulatory milestones up to $160.0 million for additional licensed products. Lilly is also obligated to pay the company sales-based milestones of up to $250.0 million for each licensed product and tiered (from mid-single-to-low-double digit) sales-based royalties for each licensed product. The 2018 Lilly Agreement will expire upon the expiration of the last royalty term, on a product-by-product and country-for country basis. The royalty term, by product and country, commences upon the first commercial sale and ends upon the later to occur of (i) the expiration of the Company’s patent rights of a product candidate developed under the Lilly Agreement, (ii) the expiration of any data exclusivity period in a country or (iii) 10 years after the first commercial sale.

The Company will have the right, and the obligation, to supply Lilly’s requirements for the material to be used in the manufacture of licensed products for clinical and commercial use. In connection with the supply responsibilities, the parties may enter into supply and quality agreements for both clinical and commercial supply.

The Company evaluated the 2018 Lilly Agreement under ASC 606 as the transactions underlying the agreement were considered transactions with a customer. The Company identified the following material promises under the arrangement: (i) exclusive license to research, develop, manufacture and commercialize licensed products, (ii) initial technology transfer, (iii) research activities (including pre-IND supply), (iv) cell line development and supply, (v) product trademark election, (vi) requirement to supply Lilly with the licensed product related to Phase 1 clinical trial (“Phase 1 Supply”) and (vii) participation in the JRC.

The Company determined that the exclusive license to research, develop, manufacture and commercialize the licensed product was not distinct from the related research and manufacturing activities to be provided by the Company as a result of Lilly being unable to benefit on its own or with other resources reasonably available in the marketplace because the license to the Company’s intellectual property requires significant specialized capabilities in order to be further developed, the research services necessary to develop the product are highly specialized and the Company’s proprietary technology is a key capability of that development. The cell line development and supply and research activities were determined not to be distinct because they are performed in conjunction with the research activities to further develop the underlying technology. The product trademark was determined not to be distinct because the benefit that Lilly receives from the Company’s trademark license only exists when combined with the right to commercialize the licensed product. In addition, the Company determined that the impact of the participation in the JRC was insignificant and had an immaterial impact on the accounting model. Therefore, the Company determined that the first five promises should be combined into a single performance obligation (the “Combined Performance Obligation”). The Company determined the sixth promise, the Phase 1 Supply promise, is distinct in the contract. As this is at no cost to Lilly, the right to receive this supply represents

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a material right and a distinct performance obligation. As such, the Company determined there were two distinct performance obligations at the outset of the 2018 Lilly Agreement.

The Company determined that the $62.5 million upfront payment represents the entirety of the consideration to be included in the transaction price as of the outset of the arrangement. The potential milestone payments that the Company may have been eligible to receive were initially excluded from the transaction price at the outset of the arrangement because (i) all development and regulatory milestone payments did not meet the criteria for inclusion using the most-likely-amount method and (ii) the Company recognizes as revenue sales-based milestones and royalties when the related sales occur. As of March 31, 2022 no milestones or royalties have been deemed likely to be achieved or have been achieved.

The Company recognizes revenue for the Combined Performance Obligation as the research, development and manufacturing services are provided using an input method, based on the cumulative costs incurred compared to the total estimated costs expected to be incurred to satisfy the Combined Performance Obligation. The transfer of control to the customer occurs over the time period that the research and development services are to be provided by the Company, and this cost-to-cost method is, in management’s judgement, the best measure of progress toward satisfying this performance obligation. The Company allocated $56.6 million of the transaction price to the Combined Performance Obligation at the outset of the arrangement.

The Phase 1 Supply was determined to be a material right, and the standalone selling price was estimated using the expected cost-plus margin approach. The Company allocated $5.9 million of the transaction price to the Phase 1 Supply at the outset of the arrangement. The Company has determined that the Phase 1 Supply will be satisfied at a point in time when the customer obtains control of each unit of product. Therefore, the Company will recognize revenue as shipments of the Phase 1 Supply are made to Lilly.

The Company reevaluates the transaction price and the total estimated costs expected to be incurred to satisfy the performance obligations at the end of each reporting period and as uncertain events, such as changes to the expected timing and cost of certain research, development and manufacturing activities that the Company is responsible for, are resolved or other changes in circumstances occur, and, if necessary, the Company will adjust its estimate of the transaction price and total estimated costs expected to be incurred.

During the three months ended March 31, 2022, consistent with the Company’s presentation to the JRC, the Company revised its estimate of total costs to complete the activities under the 2018 Lilly Agreement to reflect the Company’s experiences to date and the impact this has on its expected future research and development activities to satisfy the Combined Performance Obligation. During the three months ended March 31, 2022, there has been an increase to the total estimated costs expected to be incurred of $1.8 million verse the estimate as of December 31, 2021. The increase in total estimated costs impacted both the Company’s estimated transaction price for the 2018 Lilly Agreement, as Lilly is obligated to reimburse the Company if the costs exceed $47.5 million to complete the services, and the Company’s input method used to recognize revenue, as this measure compares the Company’s cumulative costs incurred to the Company’s total estimated costs expected to be incurred. During the three months ended March 31, 2022, based on the allocation of total transaction price to each performance obligation using the relative stand-alone selling price of each performance obligation under the 2018 Lilly Agreement, the transaction price for the Combined Performance Obligation increased by $1.6 million and the Phase 1 supply performance obligation increased by $0.2 million.

During the three months ended March 31, 2022 and 2021, the Company recognized $3.2 million and $2.9 million, respectively, of collaboration revenue. As of March 31, 2022 and December 31, 2021, the Company recorded as a contract liability deferred revenue of $19.2 million and $22.4 million, respectively, of which $19.2 million and $17.0 million, respectively, were classified as current liabilities in the accompanying balance sheet. As of March 31, 2022 and December 31, 2021, the research and development services related to the Combined Performance Obligation were expected to be performed over a remaining period of approximately 1.75 years and 2.0 years, respectively.

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Contract Liability

The changes in the total contract liability (deferred revenue) balances related to the Company’s license and collaboration agreements with Lilly were as follows (in thousands):

Three Months Ended March 31, 

    

2022

    

2021

Deferred revenues at beginning of period

$

22,367

$

31,777

Revenues deferred during the period

 

 

Revenues recognized during the period

 

(3,161)

 

(2,918)

Deferred revenues at end of period

$

19,206

$

28,859

9. Commitments and Contingencies

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and certain of its executive officers that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. The Company has not incurred any material costs as a result of such indemnifications and is not currently aware of any indemnification claims.

Legal Proceedings

The Company is not a party to any material legal proceedings. At each reporting date, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to such legal proceedings.

10. Net Loss per Share

Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

Three Months Ended March 31, 

    

2022

    

2021

Numerator:

 

  

 

  

Net loss

$

(13,859)

$

(18,973)

Net loss attributable to common stockholders

$

(13,859)

$

(18,973)

Denominator:

 

 

Weighted average common stock outstanding—basic and diluted

 

32,360,786

 

31,487,710

Net loss per share attributable to common stockholders—basic and diluted

$

(0.43)

$

(0.60)

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The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following potential common shares, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

Three Months Ended March 31, 

    

2022

    

2021

Warrants to purchase common stock

19,044

19,044

Unvested restricted stock units

221,900

Stock options to purchase common stock

 

5,003,461

4,638,399

 

5,244,405

 

4,657,443

11. Related Party Transactions

As described in Note 8 above, the Company entered into the 2018 Lilly Agreement with Lilly in April 2018. During the three months ended March 31, 2022 and 2021, the Company recognized $3.2 million and $2.9 million, respectively, of related party revenue associated with Lilly collaboration agreements. As of March 31, 2022 and December 31, 2021, the Company had deferred revenue related to the collaboration agreements with Lilly of $19.2 million and $22.4 million, respectively. As of March 31, 2022 and December 31, 2021, the Company had less than $0.1 million of outstanding receivables with Lilly.

In January 2021, the Company entered into a shared space arrangement with a portfolio company of Flagship Pioneering, one of the Company’s significant stockholders, to sublease a portion of its office and laboratory space in Cambridge, Massachusetts. The term of the shared space arrangement commenced in January 2021 and the initial term ended on December 31, 2021. Under this agreement, the Company recorded other income, net, of less than $0.1 million during the three months ended March 31, 2021 and the Company received cash payments of less than $0.1 million during the three months ended March 31, 2021.

On February 1, 2022, the Company entered into a shared space arrangement with a portfolio company of Flagship Pioneering, to sublease a portion of its office and laboratory space in Cambridge, Massachusetts. The term of the shared space arrangement commenced on February 1, 2022 and continues for an initial term ending on July 31, 2023. The agreement may be renewed for six successive one-month periods. The Company will be paid a fee based on the portfolio company’s occupancy of the office and laboratory space. Under this agreement, the Company recorded other income, net, of less than $0.1 million during the three months ended March 31, 2022. The Company also agreed to sell to the portfolio company of Flagship Pioneering, certain fixed assets of the Company for $0.2 million. The Company did not receive cash payments during the three months ended March 31, 2022 and as of March 31, 2022 the Company had $0.5 million of outstanding receivables under these agreements that were recorded within other current assets.

12. Subsequent Event

On April 14, 2022, the Company entered into an Equity Distribution Agreement with Canaccord Genuity LLC, or Canaccord, pursuant to which the Company may issue and sell shares of common stock, from time to time, having an aggregate offering price of up to $10.0 million. Sales of common stock through Canaccord may be made by any method that is deemed an “at the market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. The Company is not obligated to make any sales of its common stock under the Equity Distribution Agreement. Any sales under the Equity Distribution Agreement will be made pursuant to the Company’s registration statement on Form S-3 (File No 333- 264296), which became effective on April 22, 2022 and the prospectus relating to such offering.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Some of the numbers included herein have been rounded for the convenience of presentation. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, these forward-looking statements.

Overview

We are a clinical stage biotechnology company pioneering a new class of therapeutics and seeking to develop functional cures for patients with chronic diseases by providing stable and durable levels of therapeutic molecules to patients. We have developed our Shielded Living Therapeutics, or SLTx, platform, which combines advanced cell engineering with cutting-edge innovations in biocompatible materials and enables our product candidates to produce a wide range of therapeutic molecules that may be missing or deficient, such as proteins (including therapeutic proteins and antibodies) and hormones. We are designing our product candidates to be off-the-shelf, durable, controllable and redosable, without requiring modification of the patient’s genes or complete suppression of the patient’s immune system.

Since our inception, we have devoted substantially all of our efforts to raising capital, obtaining financing, filing and prosecuting patent applications, organizing and staffing our company and incurring research and development costs related to advancing our biomedical platform. We do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations primarily with proceeds from sales of common stock and convertible preferred stock, payments received under our collaboration agreement with Lilly and proceeds from borrowings under our credit facilities. Through March 31, 2022, we have received gross proceeds of $144.9 million from the sale of common stock in the IPO, $142.4 million from sales of our convertible preferred stock and net proceeds of $19.8 million through borrowings under our loan and security agreement with Oxford Finance LLC, or the 2020 Credit Facility, partially offset by the $15.0 million repayment of debt from our 2019 Credit Facility. We have also partnered one of our encapsulation technology programs with Lilly. Under the terms of the partnership, we received an upfront payment of $62.5 million and we are eligible to receive additional milestone payments of up to $165.0 million upon achievement of certain regulatory milestones and sales-based milestones of up to $250.0 million for SIG-002. We are also eligible to receive tiered royalty payments in the mid-single digit to low-double digit percentages based on certain sales thresholds. Finally, Lilly is obligated to reimburse us for costs incurred to perform the research and development activities for the first developed product candidate, including costs up to $47.5 million.

We have incurred significant operating losses since our inception. Our ability to generate any product revenue sufficient to achieve profitability will depend on the successful development and eventual commercialization of one or more of our product candidates. We reported a net loss of $13.9 million for the three months ended March 31, 2022. As of March 31, 2022, we had an accumulated deficit of $227.1 million and cash, cash equivalents and marketable securities totaling $103.1 million. Based on our current operating plans, we believe our cash will be sufficient to fund our anticipated level of operations, capital expenditures and satisfy debt repayments for a period of at least 12 months from the issuance date of this Quarterly Report. We expect to generate operating losses for the foreseeable future. Accordingly, we will seek additional funding through equity financings, debt financing, or additional collaboration agreements. If we are unable to raise additional funds through equity financing, debt financings or additional collaboration agreements we may be required to delay, limit, reduce or terminate product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market itself.

Our Shielded Living Therapeutics Platform and Prioritized Areas of Development

Our SLTx platform is comprised of two primary elements: the cells and the sphere. We engineered cells to express the therapeutic molecule of choice, which are subsequently encapsulated in our proprietary spheres. Our human cell line for our internal product candidates was selected for its safety, durability, scalability and engineerability, which has been extensively tested in preclinical and clinical settings. The spheres are composed of an Afibromer outer layer, an alginate conjugated with a novel, proprietary anti-fibrotic small molecule, which was derived from 10 years of work in the MIT

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labs of Professors Robert Langer and Daniel Anderson. We developed an inner compartment consisting of a proprietary conjugation of alginate and peptide molecules to enhance cell survival and productivity.

Modularity, a key attribute of our SLTx platform, is comprised of three pillars: the cells, the sphere and the manufacturing process. In addition to the cells and the sphere described above, we have also spent significant time and resources to create a state-of-the-art modular manufacturing platform for all potential product candidates developed using our cell and sphere components. This cost-effective manufacturing platform is designed to provide a true “off-the-shelf” product for patients. Furthermore, virtually all aspects of the platform, from raw materials to processing steps, are shared across our development programs, enabling a potentially streamlined path from discovery to clinical trials.

In December 2021, we announced a strategic reprioritization focusing our development efforts on mucopolysaccharidosis type 1, or MPS-1, diabetes and platform optimization. Our programs and most advanced clinical-stage and pre-clinical product candidates are outlined below:

MPS-1: SIG-005 is our product candidate that contains a cell line genetically modified with a non-viral vector to express human α-L-iduronidase, or IDUA, encapsulated within our spheres. SIG-005 is being developed to treat the non-neurological manifestations of mucopolysaccharidosis type 1, or MPS-1, in patients with the disease. We were granted Orphan Drug designation for SIG-005 for the treatment of MPS-1 by the U.S. Food and Drug Administration, or FDA, in December 2020 and by the European Commission in October 2021. We have completed pre-IND and scientific advisory meetings with the FDA, the Medicines and Healthcare products Regulatory Agency, or MHRA, and the Brazilian Health Regulatory Agency, or ANVISA. We received a Clinical Trial Application, or CTA, clearance, for SIG-005 in the United Kingdom in the third quarter of 2021 and a CTA acceptance for SIG-005 in Brazil in the first quarter of 2022.  Prior to initiating this study, we expect to submit amendments to the CTAs for SIG-005 in the United Kingdom and Brazil in the second half of 2022.

We believe our product candidates for lysosomal diseases can leverage the well understood mechanism of enzyme replacement therapies, or ERTs, by using engineered cells to express functional human enzyme or other protein that more closely resemble normal physiology in a continuous manner.  We are also developing next-generation product candidates to address the neurological manifestations of lysosomal diseases, starting with MPS-1, using transporter molecules designed to penetrate the blood brain barrier and molecules designed to extend plasma half-life.

Diabetes: SIG-002 is our product candidate designed to replace islet cells for the treatment of Type 1 Diabetes, or T1D. In T1D, the immune system attacks and destroys the insulin-producing beta cells within the endocrine islets of the pancreas. Insulin deficiency results in dysregulation of glucose metabolism. In April 2018, we partnered with Eli Lilly and Company, or Lilly, to develop cell therapies for the treatment of T1D, including SIG-002. Under the terms of the partnership, we are currently leading execution of the program through Investigational New Drug, or IND, submission and Lilly, a global leader in diabetes, will develop and commercialize the program worldwide. We expect to conduct IND-enabling studies for SIG-002 in 2023.

Platform optimization: We are continuing to optimize our Shielded Living Therapeutics, or SLTx, platform, which combines advanced cell engineering with cutting-edge innovations in biocompatible materials to pioneer a new class of therapeutics. In November 2021, we reported that spheres covered with pericapsular fibrotic overgrowth, or PFO, were observed during a retrieval procedure in its Phase 1/2 study of SIG-001 in severe or moderately severe hemophilia A. With the modularity of the SLTx platform, we are evaluating changes designed to modulate or otherwise reduce the potential for a patient’s immune response to our product candidates.

Impact of COVID-19

The COVID-19 pandemic has impacted and may continue to impact the clinical sites and startup activities for our Phase 1/2 clinical trials, including third-party manufacturing and logistics providers, which would disrupt our clinical supply chain or the availability or cost of materials, and it may affect our ability to timely complete our clinical trials and

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delay the initiation and/or enrollment of any future clinical trials, disrupt regulatory activities or have other adverse effects on our business and operations.

We are monitoring the potential impact of the COVID-19 pandemic on our business and financial statements. We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business and prospects. The extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, financial condition and liquidity, including planned and future clinical trials and research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19, the actions taken to contain or treat it, the effects of any variants as new strains evolve, vaccination efforts, and the duration and intensity of the related effects.

Components of Results of Operations

Revenue

To date, we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future. Substantially all of our revenue to date has been derived from the collaboration agreement with Lilly, which we entered into in 2018.

If our development efforts for our product candidates are successful and result in regulatory approval or if we enter into license or collaboration agreements with third parties, we may generate revenue in the future from product sales, payments from license or collaboration agreements that we may enter into with third parties, or any combination thereof. We expect that our revenue for the next several years will be derived primarily from our collaboration agreement with Lilly as well as any additional collaborations that we may enter into in the future. We cannot provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all.

Collaboration Revenue

In April 2018, we entered into a License and Collaboration Agreement with Lilly, or the 2018 Lilly Agreement. Under the 2018 Lilly Agreement, we granted Lilly an exclusive worldwide, royalty-bearing license, including the right to grant sublicenses, to our encapsulation technology applied to islet cells. We are responsible for our own costs and expenses associated with pre-clinical development of a product candidate, and completion of the studies and other criteria required for filing the first IND, up to $47.5 million; provided, however, pursuant to an amendment to the 2018 Lilly Agreement entered in May 2022, Lilly may take on certain research and development activities, at its own cost and expense, including supply and manufacturing activities. Lilly is responsible for filing the first IND, all subsequent clinical development and commercialization, all research, development and commercialization for any subsequent product candidates, as well as reimbursing us for research and development costs required for filing the first IND related to the first developed product candidate that exceed $47.5 million.

We evaluated the 2018 Lilly Agreement under ASC 606 and concluded at the outset that there were two performance obligations under the arrangement: (1) exclusive license to research, develop, manufacture and commercialize licensed products, initial technology transfer, research activities (including pre-IND supply), cell line development and supply and product trademark election, or the Combined Performance Obligation; and (2) requirement to supply Lilly with the licensed product related to Phase 1 clinical trial, or Phase 1 Supply. We determined that the $62.5 million upfront payment represents the entirety of the consideration to be included in the transaction price as of the outset of the arrangement. We allocated $56.6 million of the transaction price to the Combined Performance Obligation and $5.9 million of the transaction price to the Phase 1 Supply at the outset of the arrangement. We recognize revenue for the Combined Performance Obligation as the research and development services are provided using an input method, based on the cumulative costs incurred compared to the total estimated costs expected to be incurred to satisfy the Combined Performance Obligation. The transfer of control to the customer occurs over the time period that the research and development services are to be provided by us, and this cost-to-cost method is, in management’s judgment, the best measure of progress toward satisfying this performance obligation. We have determined that the Phase 1 Supply will be satisfied at a point in time when the customer obtains control of each unit of product. Therefore, we will recognize revenue as shipments of the Phase 1 Supply are made to Lilly.

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We reevaluate the transaction price and our total estimated costs expected to be incurred at the end of each reporting period and as uncertain events, such as changes to the expected timing and cost of certain research, development and manufacturing activities that we are responsible for, are resolved or other changes in circumstances occur, and, if necessary, we will adjust our estimate of the transaction price or our total estimated costs expected to be incurred.

Additional information regarding the 2018 Lilly Agreement can be found in Note 8 to our financial statements in this Quarterly Report on Form 10-Q.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for our research activities, including our drug discovery efforts and the development of our platform and product candidates. We expense research and development costs as incurred, which include:

employee-related expenses, including salaries, bonuses, benefits, stock-based compensation, other related costs for those employees involved in research and development efforts;
expenses incurred in connection with the clinical and preclinical development of our product candidates and research programs, including under agreements with third parties, such as consultants, contractors, and CROs;
the cost of raw materials and developing and scaling our manufacturing process and manufacturing product candidates for use in our research and preclinical studies, including under agreements with third parties, such as consultants, contractors, and CMOs;
laboratory supplies and research materials;
facilities, depreciation, and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and insurance; and
payments made under third-party licensing agreements.

We expense research and development costs as incurred. Non-refundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed, or when it is no longer expected that the goods will be delivered or the services rendered. Upfront payments under license agreements are expensed upon receipt of the license, and annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued, with a corresponding expense being recognized, in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.

Our direct external research and development expenses are tracked on a program-by-program basis, including our early-stage programs, and consist of costs that include fees, reimbursed materials, and other costs paid to consultants, contractors, contract manufacturing organizations or CMOs, and contract research organizations or CROs, in connection with our preclinical and manufacturing activities. Except for personnel expenses related to SIG-002, we do not allocate employee costs, costs associated with our discovery efforts, laboratory supplies and facilities expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple programs and our platform and, as such, are not separately classified. The personnel expenses allocated to SIG-002 do not include stock-based compensation expense.

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Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials. We expect that our research and development expenses will increase substantially in connection with our planned preclinical and clinical development activities in the near term and in the future. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any of our product candidates. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the following:

investigation of the preliminary results from our Phase 1/2 clinical trial for SIG-001, including the finding of spheres with PFO and the reported SAE;
the timing and progress of preclinical and clinical development activities;
the number and scope of preclinical and clinical programs we decide to pursue;
raising additional funds necessary to complete preclinical and clinical development of and commercialize our product candidates;
the progress of the development efforts of parties with whom we may enter into collaboration arrangements;
our ability to maintain our current research and development programs and to establish new ones;
our ability to establish new licensing or collaboration arrangements;
the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA, or any comparable foreign regulatory authority;
the receipt and related terms of regulatory approvals from applicable regulatory authorities;
the availability of raw materials for use in production of our product candidates;
our ability to consistently manufacture our product candidates for use in clinical trials;
our ability to establish and operate a manufacturing facility, or secure manufacturing supply through relationships with third parties;
our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;
our ability to protect our rights in our intellectual property portfolio;
the commercialization of our product candidates, if and when approved;
obtaining and maintaining third-party insurance coverage and adequate reimbursement;
the acceptance of our product candidates, if approved, by patients, the medical community and third-party payors;
competition with other products; and
a continued acceptable safety profile of our therapies following approval.

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A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of these product candidates. We may never succeed in obtaining regulatory approval for any of our product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and personnel expenses, including stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources, and other administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters; professional fees paid for accounting, auditing, consulting, and tax services; insurance costs; travel expenses; and facility costs not otherwise included in research and development expenses.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will incur significantly increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if and when we believe a regulatory approval of a product candidate appears likely, we anticipate an increase in payroll and other employee-related expenses as a result of our preparation for commercial operations, especially as it relates to the sales and marketing of that product candidate.

Other Income (Expense)

Interest Income

Interest income consists of interest earned on our cash, cash equivalents and marketable securities balances. We expect our interest income will fluctuate based on the timing and ability to raise additional funds as well as the amount of expenditures for our platform development and ongoing business operations.

Interest Expense

Interest expense consists of interest expense on outstanding borrowings under our loan and security agreements as well as amortization of debt discount and deferred financing costs.

Other Income (Expense)

Other expense consists primarily of losses on the disposal of fixed assets, net foreign exchange losses and net sublease income from subleasing a portion of our facilities.

Income Taxes

Since our inception in 2015, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. We did not provide for any income taxes in the three months ended March 31, 2022 or 2021.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events, and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. The accounting estimates and policies discussed in our Annual Report on Form

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10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 14, 2022, or the Annual Report, are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations. There have been no material changes to that information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 14, 2022.

Results of Operations

Comparison of the Three Months ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 

Increase

    

2022

    

2021

    

(Decrease)

(in thousands)

Revenue

 

 

  

 

  

Collaboration revenue

$

3,165

$

2,958

$

207

Operating expenses:

 

 

 

Research and development

 

11,618

 

15,985

 

(4,367)

General and administrative

 

5,024

 

5,540

 

(516)

Total operating expenses

 

16,642

 

21,525

 

(4,883)

Loss from operations

 

(13,477)

 

(18,567)

 

5,090

Other income (expense):

 

 

 

Interest income

 

64

86

 

(22)

Interest expense

 

(491)

(488)

 

(3)

Other expense

 

45

(4)

 

49

Total other expense, net

 

(382)

 

(406)

 

24

Net loss and comprehensive loss

$

(13,859)

$

(18,973)

$

5,114

Revenue

Revenue was $3.2 million for the three months ended March 31, 2022, compared to $3.0 million for the three months ended March 31, 2021. The increase in revenue of $0.2 million was due to the timing of costs of the activities performed under the 2018 Lilly Agreement. We recognizes revenue under the 2018 Lilly Agreement based on the input method and as the costs incurred increased by $0.2 million from the three months ended March 31, 2021 to the three months ended March 31, 2022 the income recognized also increased.

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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2022 and 2021:

Three Months Ended

March 31, 

Increase

    

2022

    

2021

    

(Decrease)

(in thousands)

Direct research and development expenses by program:

  

  

  

SIG‑005

$

1,869

$

1,564

$

305

SIG‑002

 

2,727

 

2,616

 

111

SIG‑001

1,457

1,581

(124)

SIG‑007

197

695