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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 June 30, 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 August 1, 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 June 30, 2022 and December 31, 2021

5

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021

6

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2022 and 2021

7

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 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

22

Item 3.

Quantitative and Qualitative Disclosures About Market and Risk

34

Item 4.

Controls and Procedures

34

PART II - Other Information

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

93

Item 3.

Defaults upon Senior Securities

93

Item 4.

Mine Safety Disclosures

93

Item 5.

Other Information

94

Item 6.

Exhibits

94

Signatures

95

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 serious adverse events in addition to the serious adverse event 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.
If we cannot comply with Nasdaq’s continued listing standards, our common stock could be delisted.

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)

June 30, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

34,545

$

107,143

Marketable securities

53,662

16,213

Accounts receivable (inclusive of $23 and $23 from a related party at June 30, 2022 and December 31, 2021, respectively)

 

23

 

59

Prepaid expenses and other current assets

 

3,602

 

2,729

Restricted cash—current

 

339

 

250

Total current assets

 

92,171

 

126,394

Property and equipment, net

 

3,401

 

3,994

Right‑of‑use assets

 

10,817

 

12,863

Restricted cash

 

1,029

 

1,118

Total assets

$

107,418

$

144,369

Liabilities and stockholders’ equity (deficit)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

1,051

$

2,344

Accrued expenses and other current liabilities

 

6,505

 

8,998

Lease liabilities, current portion

 

4,441

 

4,845

Current portion of long‑term debt

 

5,000

 

1,667

Deferred revenue from related party, current portion

 

16,323

 

17,034

Total current liabilities

 

33,320

 

34,888

Deferred revenue from related party, net of current portion

 

 

5,333

Lease liability, net of current portion

 

6,793

 

8,577

Long‑term debt, net of discount and current portion

 

15,218

 

18,411

Other liabilities

 

281

 

Total liabilities

55,612

67,209

Commitments and contingencies (Note 9)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, par value $0.001 per share; 175,000,000 shares authorized at June 30, 2022 and December 31, 2021; 32,399,257 and 32,359,895 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

 

32

 

32

Preferred stock, par value $0.001 per share; 25,000,000 shares authorized at June 30, 2022 and December 31, 2021; no shares issued and outstanding at June 30, 2022 and December 31, 2021

 

 

Additional paid‑in capital

 

293,774

 

290,377

Accumulated other comprehensive loss

(556)

(10)

Accumulated deficit

 

(241,444)

 

(213,239)

Total stockholders’ equity

 

51,806

 

77,160

Total liabilities and stockholders’ equity

$

107,418

$

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 June 30, 

Six Months Ended June 30, 

  

2022

2021

2022

2021

Revenue

 

  

 

  

 

  

 

  

Collaboration revenue (inclusive of $2,883, $6,044, $2,662 and $5,606 from a related party for the three and six months ended June 30, 2022 and 2021, respectively)

$

2,883

$

2,704

$

6,048

$

5,662

Operating expenses:

 

 

 

 

  

Research and development

 

11,877

 

17,751

 

23,495

 

33,736

General and administrative

5,042

4,992

10,066

 

10,532

Total operating expenses

 

16,919

 

22,743

 

33,561

 

44,268

Loss from operations

 

(14,036)

 

(20,039)

 

(27,513)

 

(38,606)

Other income (expense), net:

 

  

 

  

 

  

 

  

Interest income

 

178

71

242

157

Interest expense

 

(543)

(494)

(1,034)

(982)

Other income

 

55

25

100

21

Total other expense, net

 

(310)

 

(398)

 

(692)

 

(804)

Net loss attributable to ordinary shareholders

$

(14,346)

$

(20,437)

$

(28,205)

$

(39,410)

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

$

(0.44)

$

(0.65)

$

(0.87)

$

(1.25)

Weighted average common stock outstanding—basic and diluted

 

32,399,257

31,571,704

32,380,128

31,529,939

Other comprehensive loss

Unrealized loss on marketable debt securities

(167)

(546)

Total other comprehensive loss

(167)

(546)

Total comprehensive loss

$

(14,513)

$

(20,437)

$

(28,751)

$

(39,410)

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

Stock‑based compensation expense

 

1,731

1,731

Unrealized loss on marketable debt securities

(167)

(167)

Net loss

 

(14,346)

(14,346)

Balances at June 30, 2022

 

32,399,257

$

32

$

293,774

$

(556)

$

(241,444)

$

51,806

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

Issuance of common stock upon exercise of stock options

 

362,068

486

486

Stock‑based compensation expense

 

1,986

1,986

Net loss

 

(20,437)

(20,437)

Payment of deferred offering costs

Balances at June 30, 2021

 

31,864,020

$

32

$

286,373

$

$

(175,338)

$

111,067

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

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Sigilon Therapeutics, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

Six Months Ended June 30, 

     

2022

     

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(28,205)

 

$

(39,410)

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

 

 

Depreciation and amortization expense

 

633

 

510

Gain on disposal of fixed assets

(20)

Stock‑based compensation expense

 

3,349

 

3,690

Non‑cash lease expense

 

2,114

 

2,367

Non‑cash interest expense

 

140

 

134

Amortization of premium on marketable securities

45

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

36

 

(1)

Prepaid expenses and other current assets

 

(873)

 

(1,882)

Accounts payable

 

(1,095)

 

3,046

Accrued expenses and other current liabilities

 

(2,374)

 

898

Other liabilities

 

281

 

Lease liabilities

 

(2,256)

 

(2,464)

Deferred revenue

 

(6,044)

 

(5,548)

Net cash used in operating activities

 

(34,269)

 

(38,660)

Cash flows from investing activities:

 

  

 

  

Purchases of marketable securities

(41,040)

Proceeds from maturities of marketable securities

3,000

Purchase of property and equipment

 

(506)

 

(997)

Proceed from the sale of fixed assets

169

Net cash used in investing activities

 

(38,377)

 

(997)

Cash flows from financing activities:

 

  

 

  

Payments of deferred offering costs

 

 

(622)

Proceeds from employee equity plans

48

 

631

Net cash provided by financing activities

 

48

 

9

Net decrease in cash, cash equivalents and restricted cash

 

(72,598)

 

(39,648)

Cash, cash equivalents and restricted cash at beginning of period

 

108,511

 

203,422

Cash, cash equivalents and restricted cash at end of period

$

35,913

 

$

163,774

Supplemental disclosure of cash flow information:

 

  

 

  

Cash paid for interest

$

888

 

$

845

Supplemental disclosures of noncash investing and financing activities:

 

 

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

$

68

 

$

564

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

$

5

 

$

187

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

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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 June 30, 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 $14.3 million and $28.2 million for the three and six months ended June 30, 2022, respectively, and $77.3 million for the year ended December 31, 2021. In addition, as of June 30, 2022, the Company had an accumulated deficit of

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$241.4 million. The Company expects to generate significant losses and negative cash flows from operations for the foreseeable future.

Based on its current operating plans, the Company believes its cash, cash equivalents and marketable securities of $88.2 million as of June 30, 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 and stock-based awards. 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.

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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 June 30, 2022, the Company’s accounts receivable was related to one customer and as of December 31, 2021, the Company’s accounts receivable were related to two customers. As of June 30, 2022 and December 31, 2021, 100% and 39%, 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

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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.

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 June 30, 2022 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 and six months ended June 30, 2022, 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 June 30, 2022 and December 31, 2021 (in thousands):

Fair value measurements as of

June 30, 2022

    

Level 1

    

Level 2

    

Level 3

    

Total

Cash equivalents

 

  

 

  

 

  

 

  

Money market funds

$

16,948

$

$

$

16,948

Commercial paper

11,494

11,494

U.S. Treasuries

999

999

Total cash equivalents

16,948

12,493

29,441

Marketable securities

Corporate bonds

24,898

24,898

Commercial paper

16,624

16,624

U.S. Government Agencies

1,230

1,230

U.S. Treasuries

10,910

10,910

Total marketable securities

53,662

53,662

Total

$

16,948

$

66,155

$

$

83,103

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 June 30, 2022 and December 31, 2021 (in thousands):

Fair value measurements as of

June 30, 2022

Gross

Gross

Amortized

Unrealized

Unrealized

Credit

    

Cost

    

Gains

    

Losses

    

Losses

    

Total

Corporate bonds

$

25,316

$

$

(418)

$

$

24,898

Commercial paper

16,703

(79)

16,624

U.S. Treasuries

1,250

(20)

1,230

U.S. Government Agencies

10,943

(33)

10,910

Total

$

54,212

$

$

(550)

$

$

53,662

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 as of June 30, 2022 and December 31, 2021.

The following table summarizes the Company’s available-for-sale marketable debt securities by contractual maturity as of June 30, 2022 and December 31, 2021 (in thousands):

June 30, 

December 31, 

2022

2021

Maturities in one year or less

$

45,420

$

9,004

Maturities between one and two years

 

8,242

 

7,209

Total

$

53,662

$

16,213

As of June 30, 2022 and December 31, 2021 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 June 30, 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):

June 30, 

December 31, 

    

2022

2021

Laboratory equipment

$

6,325

$

6,297

Leasehold improvements

 

78

 

78

Furniture and fixtures

 

620

 

620

Computers and software

 

147

 

163

 

7,170

 

7,158

Less: Accumulated depreciation and amortization

 

(3,769)

 

(3,164)

Total property and equipment, net

$

3,401

$

3,994

Depreciation and amortization expense for the three and six months ended June 30, 2022 and 2021 was $0.3 million, $0.6 million, $0.3 million and $0.5 million, respectively.

5. Accrued Expenses and Other Current Liabilities

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

June 30, 

December 31, 

    

2022

    

2021

Employee compensation and benefits

$

2,019

$

3,071

External research and development costs

 

3,629

 

5,056

Legal and professional fees

 

605

 

656

Other

 

252

 

215

Total accrued expenses and other current liabilities

$

6,505

$

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 June 30, 2022 and December 31, 2021, long-term debt consisted of the following (in thousands):

    

June 30, 

December 31, 

    

2022

2021

Principal amount of long‑term debt

$

20,000

$

20,000

Less: Current portion of long‑term debt

(5,000)

 

(1,667)

Long‑term debt, net of current portion

 

15,000

 

18,333

Final debt payment liability

700

700

Debt discount, net of accretion

 

(482)

 

(622)

Long‑term debt, net of discount and current portion

$

15,218

$

18,411

As of June 30, 2022 and December 31, 2021, the interest rate applicable to borrowings under the 2020 Credit Facility was 9.35% and 8.40%, respectively.

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

June 30, 

    

2022

2022 (Remaining six months)

$

1,666

2023

 

6,667

2024

 

6,667

2025

5,000

2026

$

20,000

As of June 30, 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 June 30, 2022, there were 1,722,783 shares available for issuance under the 2020 Equity Incentive Plan and 882,827 shares available for issuance under the 2020 Employee Stock Purchase 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

 

Six months ended

 

June 30, 

 

June 30, 

 

2022

2021

 

2022

2021

 

Risk-free interest rate

 

2.61

%  

 

1.05

%

 

1.69

%  

 

0.72

%

Expected dividend yield

 

0.00

%  

 

0.00

%

 

0.00

%  

 

0.00

%

Expected term (in years)

 

5.9

 

5.9

 

6.0

 

6.1

Expected volatility

 

83.87

%  

 

78.09

%

 

84.25

%  

 

78.34

%

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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

 

2,453,590

 

2.29

 

Options cancelled

 

(560,962)

 

6.96

 

Options exercised

 

(833)

 

0.57

Outstanding and expected to vest at June 30, 2022

5,030,441

7.04

8.2

32

Exercisable at June 30, 2022

 

1,915,304

$

7.39

 

6.6

$

27

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 and six months ended June 30, 2022 and 2021 were less than $0, less than $0.1 million, $3.6 million and $4.7 million, respectively. The weighted average grant date fair value of stock options during the three and six months ended June 30, 2022 and 2021 were $0.86, $1.63, $8.35 and $23.56 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

 

(77,500)

 

5.62

Unvested shares as of June 30, 2022

197,900

$

5.55

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

Six months ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Research and development

$

549

$

871

$

1,064

$

1,710

General and administrative

 

1,182

 

1,115

 

2,285

 

1,980

$

1,731

$

1,986

$

3,349

$

3,690

As of June 30, 2022, total unrecognized stock-based compensation expense related to unvested stock-based awards and units was $14.0 million, which is expected to be recognized over a weighted average period of 2.4 years.

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At-the-Market Offering

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 our registration statement on Form S-3 (File No 333- 264296), which became effective on April 22, 2022 and the prospectus relating to such offering. There were no sales under the Equity Distribution Agreement as of June 30, 2022.

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

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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 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 June 30, 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 six months ended June 30, 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 six months ended June 30, 2022, there has been an increase to the total estimated costs expected to be incurred of $6.1 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 six months ended June 30, 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 $5.5 million and the Phase 1 supply performance obligation increased by $0.6 million.

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During the three and six months ended June 30, 2022 and 2021, the Company recognized $2.9 million, $6.0 million, $2.6 million and $5.5 million, respectively, of collaboration revenue. As of June 30, 2022 and December 31, 2021, the Company recorded as a contract liability deferred revenue of $16.3 million and $22.4 million, respectively, of which $16.3 million and $17.0 million, respectively, were classified as current liabilities in the accompanying balance sheet. As of June 30, 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 2.0 years.

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 June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Deferred revenues at beginning of period

$

19,206

$

28,859

$

22,367

$

31,777

Revenues deferred during the period

 

 

 

 

Revenues recognized during the period

 

(2,883)

 

(2,630)

 

(6,044)

 

(5,548)

Deferred revenues at end of period

$

16,323

$

26,229

$

16,323

$

26,229