SEC Filing – Sigilon Therapeutics, Inc.

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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, 2023

☐	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 1, 2023, there were 32,524,816 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding

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Sigilon Therapeutics, Inc.

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		Page
PART I - Financial Information
Item 1.	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022	5
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022	6
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022	7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market and Risk	30
Item 4.	Controls and Procedures	30
PART II - Other Information		31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 3.	Defaults upon Senior Securities	85
Item 4.	Mine Safety Disclosures	85
Item 5.	Other Information	85
Item 6.	Exhibits	85
	Signatures	87

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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 cannot comply with Nasdaq’s continued listing standards, our common stock could be delisted, which would harm our business, the trading price of our common stock, our ability to raise additional capital and the liquidity of the market for our common stock.

●

Negative results of preclinical or clinical studies of any of our product candidates 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. If we are unable to advance our product candidates to clinical development, obtain regulatory approval and ultimately commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.

●

Drug development is a lengthy, expensive, and inherently uncertain process, with a high risk of failure at every stage of development, and any favorable preclinical results are not predictive of results that may be observed in 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, 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 our 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 competitors could develop and commercialize products and technologies similar or identical to ours, and our ability to successfully commercialize any product candidates we develop, and our SLTx platform may be adversely affected.

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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 timing and progress of our research and development programs and preclinical studies and the submission or approval of Investigational New Drug, or IND, applications for our product candidates, including our plans to conduct non-human primate and IND-enabling studies for SIG-002 in the second half of 2023, with an expected IND submission in 2024;

●

our ability to advance any product candidates that we may develop and successfully complete any clinical studies, including the process development, scale up and manufacturing activities for our product candidates;

●

our ability to fund our operating expenses, capital expenditures requirements and debt service payments into 2025;

●

our belief that, at commercial scale, the cost of goods for some of our programs will be significantly lower than existing cell or gene therapies;

●

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.

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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,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	41,255	$	42,066
Marketable securities		15,114		27,560
Accounts receivable		3,162		2,171
Unbilled accounts receivable		1,798		1,287
Prepaid expenses and other current assets		3,067		1,077
Restricted cash, current portion		251		250
Total current assets		64,647		74,411
Property and equipment, net		2,872		2,854
Right‑of‑use assets		8,031		8,979
Restricted cash		1,038		1,034
Total assets	$	76,588	$	87,278
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,331	$	936
Accrued expenses and other current liabilities		3,506		6,021
Lease liabilities, current portion		4,498		4,485
Current portion of long‑term debt		6,667		6,667
Deferred revenue from related party, current portion		12,987		12,885
Total current liabilities		28,989		30,994
Lease liability, net of current portion		3,892		4,888
Long‑term debt, net of discount and current portion		10,413		12,021
Other liabilities		—		233
Total liabilities		43,294		48,136
Commitments and contingencies (Note 9)
Stockholders’ equity
Common stock, par value $0.001 per share; 175,000,000 shares authorized at March 31, 2023 and December 31, 2022; 32,524,816 and 32,466,737 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively		32		32
Preferred stock, par value $0.001 per share; 25,000,000 shares authorized at March 31, 2023 and December 31, 2022; no shares issued and outstanding at March 31, 2023 and December 31, 2022		—		—
Additional paid‑in capital		297,713		296,339
Accumulated other comprehensive loss		(273)		(429)
Accumulated deficit		(264,178)		(256,800)
Total stockholders’ equity		33,294		39,142
Total liabilities and stockholders’ equity	$	76,588	$	87,278

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

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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,
	2023		2022
Revenue
Collaboration revenue	$	4,858	$	3,165
Operating expenses:
Research and development		7,782		11,618
General and administrative		4,323		5,024
Total operating expenses		12,105		16,642
Loss from operations		(7,247)		(13,477)
Other income (expense), net:
Interest income		476		64
Interest expense		(611)		(491)
Other income, net		4		45
Total other income (expense), net		(131)		(382)
Net loss attributable to ordinary shareholders	$	(7,378)	$	(13,859)
Net loss per share attributable to common stockholders—basic and diluted	$	(0.23)	$	(0.43)
Weighted average common stock outstanding—basic and diluted		32,467,382		32,360,786

Other comprehensive gain (loss)
Unrealized gain (loss) on marketable debt securities		156		(379)
Total other comprehensive gain (loss)		156		(379)
Total comprehensive loss	$	(7,222)	$	(14,238)

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

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Sigilon Therapeutics, Inc.

Condensed Consolidated Statements of

Stock and Stockholders’ Equity

(Unaudited, in thousands, except share amounts)


						Accumulated
				Additional		Other				Total
	Common Stock			Paid‑In		Comprehensive		Accumulated		Stockholders’
	Shares	Amount		Capital		Loss		Deficit		Equity
Balances at December 31, 2022	32,466,737	$	32	$	296,339	$	(429)	$	(256,800)	$	39,142
Issuance of ESPP shares	58,079		—		25		—		—		25
Stock‑based compensation expense	—		—		1,349		—		—		1,349
Unrealized gain on marketable debt securities	—		—		—		156		—		156
Net loss	—		—		—		—		(7,378)		(7,378)
Balances at March 31, 2023	32,524,816	$	32	$	297,713	$	(273)	$	(264,178)	$	33,294

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

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)


	Three Months Ended March 31,
	2023		2022
Cash flows from operating activities:
Net loss	$	(7,378)	$	(13,859)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization expense		315		316
Loss (Gain) on disposal of fixed assets		8		(20)
Stock‑based compensation expense		1,349		1,618
Non‑cash lease expense		948		1,223
Non‑cash interest expense		59		66
Amortization of premium on marketable securities		13		35
Changes in operating assets and liabilities:
Accounts receivable		(991)		(3)
Unbilled accounts receivable		(511)		—
Prepaid expenses and other current assets		(1,980)		(3,336)
Accounts payable		395		(186)
Accrued expenses and other current liabilities		(2,515)		(819)
Other liabilities		(233)		—
Lease liabilities		(983)		(1,362)
Deferred revenue		102		(3,161)
Net cash used in operating activities		(11,402)		(19,488)
Cash flows from investing activities:
Purchases of marketable securities		—		(22,819)
Proceeds from maturities of marketable securities		12,589		—
Purchase of property and equipment		(351)		(397)
Net cash provided by (used in) investing activities		12,238		(23,216)
Cash flows from financing activities:
Repayment of debt		(1,667)		—
Proceeds from the exercise of common stock options and employee equity plans		25		48
Net cash (used in) provided by financing activities		(1,642)		48
Net decrease in cash, cash equivalents and restricted cash		(806)		(42,656)
Cash, cash equivalents and restricted cash at beginning of period		43,350		203,422
Cash, cash equivalents and restricted cash at end of period	$	42,544	$	160,766
Supplemental disclosure of cash flow information:
Cash paid for interest	$	550	$	420
Supplemental disclosures of noncash investing and financing activities:
Gain on trade-in of fixed assets	$	40	$	—
Receivable for proceeds from the sale of property and equipment in prepaid expenses and other current assets	$	—	$	169
Sale of property and equipment in prepaid expenses and other current assets	$	10	$	—
Purchases of property and equipment included in accounts payable and accrued expenses	$	—	$	85
Right-of-use assets obtained in exchange for lease liabilities	$	—	$	68

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 preclinical stage biotechnology company pioneering a new class of therapeutics and seeking to develop functional cures for patients with a wide range of diseases by providing stable and durable levels of therapeutic molecules to patients. 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 and cash flows as of and for the periods presented. The accompanying Condensed Consolidated Balance Sheet as of December 31, 2022 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, 2022 (the “2022 Form 10-K”). The Company’s significant accounting policies are described in Note 2 to the Notes to Financial Statements in the 2022 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, 2023, the Company has funded its operations primarily with proceeds from its initial public offering, 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 $7.4 million for the three months ended March 31, 2023 and $43.6 million for the year ended December 31, 2022. In addition, as of March 31, 2023, the Company had an accumulated deficit of $264.2 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 $56.4 million as of March 31, 2023 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.

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.

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, 2023 and December 31, 2022, 100% 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 or secure sufficient inventory of these raw materials, 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.

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, 2023 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

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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, 2023, 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, 2023 and December 31, 2022 (in thousands):


	Fair value measurements as of
	March 31, 2023
	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	38,145	$	—	$	—	$	38,145
Total cash equivalents		38,145		—		—		38,145
Marketable securities
Corporate bonds		—		13,057		—		13,057
Commercial paper		—		811		—		811
U.S. Government Agencies		—		1,246		—		1,246
Total marketable securities		—		15,114		—		15,114
Total	$	38,145	$	15,114	$	—	$	53,259


	Fair value measurements as of
	December 31, 2022
	Level 1		Level 2		Level 3		Total
Cash equivalents
Money market funds	$	29,310	$	—	$	—	$	29,310
Commercial paper		—		1,994		—		1,994
U.S. Government Agencies		—		4,999		—		4,999
Total cash equivalents		29,310		6,993		—		36,303
Marketable securities
Corporate bonds		—		21,594		—		21,594
Commercial paper		—		1,738		—		1,738
U.S. Government Agencies		—		1,235		—		1,235
U.S. Treasuries		—		2,993		—		2,993
Total marketable securities		—		27,560		—		27,560
Total	$	29,310	$	34,553	$	—	$	63,863

Marketable Securities

The following tables summarizes the Company’s available-for-sale marketable debt securities as of March 31, 2023 and December 31, 2022 (in thousands):


	Fair value measurements as of
	March 31, 2023
			Gross		Gross
	Amortized		Unrealized		Unrealized		Credit
	Cost		Gains		Losses		Losses		Total
Corporate bonds	$	13,308	$	—	$	(251)	$	—	$	13,057
Commercial paper		828		—		(17)		—		811
U.S. Government Agencies		1,249		—		(3)		—		1,246
Total	$	15,385	$	—	$	(271)	$	—	$	15,114

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	Fair value measurements as of
	December 31, 2022
			Gross		Gross
	Amortized		Unrealized		Unrealized		Credit
	Cost		Gains		Losses		Losses		Total
Corporate bonds	$	21,994	$	—	$	(400)	$	—	$	21,594
Commercial paper		1,743		—		(5)		—		1,738
U.S. Government Agencies		1,248		—		(13)		—		1,235
U.S. Treasuries		2,999		—		(6)		—		2,993
Total	$	27,984	$	—	$	(424)	$	—	$	27,560

The unrealized losses at March 31, 2023 and December 31, 2022 were attributed to changes in interest rates and unrealized losses do not represent credit losses.

The following table summarizes the Company’s available-for-sale marketable debt securities by contractual maturity as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31,		December 31,
	2023		2022
Maturities in one year or less	$	14,155	$	23,231
Maturities between one and two years		959		4,329
Total	$	15,114	$	27,560

The carrying value of the Company’s long-term debt approximates its fair value at March 31, 2023 and December 31, 2022 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.

As of March 31, 2023 and December 31, 2022 the Company did not have any other financial assets and liabilities that were measured at fair value on a recurring basis.

4. Property and Equipment, Net

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


	March 31,		December 31,
	2023		2022
Laboratory equipment	$	6,419	$	6,301
Leasehold improvements		78		78
Furniture and fixtures		620		620
Computers and software		256		177
		7,373		7,176
Less: Accumulated depreciation and amortization		(4,501)		(4,322)
Total property and equipment, net	$	2,872	$	2,854

Depreciation and amortization expense for the three months ended March 31, 2023 and 2022 was $0.3 million.

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5. Accrued Expenses and Other Current Liabilities

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


	March 31,		December 31,
	2023		2022
Employee compensation and benefits	$	2,139	$	4,243
External research and development costs		517		817
Legal and professional fees		622		714
Interest on long-term debt		185		195
Other		43		52
Total accrued expenses and other current liabilities	$	3,506	$	6,021

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 2022 Form 10-K.

As of March 31, 2023 and December 31, 2022, long-term debt consisted of the following (in thousands):


	March 31,		December 31,
	2023		2022
Principal amount of long‑term debt	$	16,667	$	18,333
Less: Current portion of long‑term debt		(6,667)		(6,667)
Long‑term debt, net of current portion		10,000		11,666
Final debt payment liability		700		700
Debt discount, net of accretion		(287)		(345)
Long‑term debt, net of discount and current portion	$	10,413	$	12,021

As of March 31, 2023 and December 31, 2022, the interest rate applicable to borrowings under the loan and security agreement with Oxford Finance LLC (the “2020 Credit Facility”) was 12.9% and 12.4%, respectively.

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


	March 31,
	2023
2023	$	5,000
2024		6,667
2025		5,000
2026		—
2027		—
	$	16,667

As of March 31, 2023, 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, 2023, there were 1,665,707 shares available for issuance under the 2020 Equity Incentive Plan and 1,119,895 shares available for issuance under the 2020 Employee Stock Purchase Plan.

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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. The 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,
	2023			2022
Risk-free interest rate		4.08	%		1.61	%
Expected dividend yield		0.00	%		0.00	%
Expected term (in years)		6.1			6.0
Expected volatility		94.95	%		84.28	%

Stock Option Activity

The following table summarizes the Company’s stock option activity since December 31, 2022:


				Weighted
				average
		Weighted		remaining	Aggregate
	Number of	average		contractual term	intrinsic value
	options	exercise price		(in years)	(in thousands)
Balances at December 31, 2022	4,912,386	$	6.63	7.8	$	—
Options granted	1,714,328		1.09
Options cancelled	(225,788)		3.41
Outstanding and expected to vest at March 31, 2023	6,400,926		5.26	8.1		72
Exercisable at March 31, 2023	2,686,982	$	6.95	6.6	$	38

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.

No stock options were exercised during the three months ended March 31, 2023. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2022 were $0.1 million. The weighted average grant date fair value of stock options during the three months ended March 31, 2023 and 2022 were $0.86 and $1.69 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.

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The following table summarizes restricted stock unit activity since December 31, 2022:


		Weighted
		average grant
	Shares	date fair value
Unvested shares as of December 31, 2022	150,400	$	5.54
Forfeited	(5,200)		5.65
Unvested shares as of March 31, 2023	145,200	$	5.54

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,
	2023		2022
Research and development	$	432	$	516
General and administrative		917		1,102
	$	1,349	$	1,618

As of March 31, 2023, total unrecognized stock-based compensation expense related to unvested stock-based awards and units was $10.0 million, which is expected to be recognized over a weighted average period of 2.0 years.

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 the 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 March 31, 2023.

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.

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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 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, 2023 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.

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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, 2023, 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, 2023, there has been an increase to the total estimated costs expected to be incurred of $5.2 million verse the estimate as of December 31, 2022. 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, which occurred in September 2022, 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, 2023, 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 $5.7 million and the Phase 1 supply performance obligation increased by $0.6 million.

During the three months ended March 31, 2023 and 2022, the Company recognized $4.9 million and $3.2 million, respectively, of collaboration revenue. As of March 31, 2023 and December 31, 2022, the Company recorded as a contract liability deferred revenue of $13.0 million and $12.9 million, respectively, which were classified as current liabilities in the accompanying balance sheet. As of March 31, 2023 and December 31, 2022, 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.

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,
	2023		2022
Deferred revenues at beginning of period	$	12,885	$	22,367
Revenues deferred during the period		4,960		—
Revenues recognized during the period		(4,858)		(3,161)
Deferred revenues at end of period	$	12,987	$	19,206

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

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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

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,
	2023		2022
Numerator:
Net loss	$	(7,378)	$	(13,859)
Net loss attributable to common stockholders	$	(7,378)	$	(13,859)
Denominator:
Weighted average common stock outstanding—basic and diluted		32,467,382		32,360,786
Net loss per share attributable to common stockholders—basic and diluted	$	(0.23)	$	(0.43)

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,
	2023	2022
Warrants to purchase common stock	19,044	19,044
Unvested restricted stock units	145,200	221,900
Stock options to purchase common stock	6,400,926	5,003,461
	6,565,170	5,244,405

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, 2023 and 2022, the Company recognized $4.9 million and $3.2 million, respectively, of related party revenue associated with Lilly collaboration agreements. As of March 31, 2023 and December 31, 2022, the Company had deferred revenue related to the collaboration agreements with Lilly of $13.0 million and $12.9 million, respectively. As of March 31, 2023 and December 31, 2022, the Company had $3.2 million and $2.2 million of outstanding receivables with Lilly. Further, as of March 31, 2023 and December 31, 2022, the Company had $1.8 million and $1.3 million of unbilled receivables with Lilly.

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

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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, 2023, respectively. The Company received $0.3 million of cash payments during the three months ended March 31, 2023 and as of March 31, 2023, the Company had $0.9 million of outstanding receivables under this agreement.

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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 preclinical stage biotechnology company pioneering a new class of therapeutics and seeking to develop functional cures for patients with acute and 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 cell differentiation and biocompatible materials, and enables our product candidates to provide a wide range of functions or therapeutic molecules that may be missing or dysfunctional in patients. We are designing our product candidates to be off-the-shelf, durable, controllable and redosable, without requiring modification of the patient’s genes or chronic 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, 2023, we have received gross proceeds of $144.9 million from the sale of common stock in the initial public offering, $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 payments of up to $250.0 million upon achievement of sales-based milestones 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 incurred over $47.5 million, which was exceeded in September 2022.

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 $7.4 million for the three months ended March 31, 2023. As of March 31, 2023, we had an accumulated deficit of $264.2 million and cash, cash equivalents and marketable securities totaling $56.4 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 differentiate stem cells into the appropriate cell types, such as islet cells in the case of our diabetes program, which both sense and respond. We also engineer cells to express a therapeutic molecule of choice in a continuous manner, which we refer to as constitutive expression. Our human cell lines are selected for each indication based on their safety, durability, scalability, functionality

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and engineerability. These cells are subsequently encapsulated in our proprietary and biocompatible spheres. The spheres are composed of an Afibromer outer layer, an alginate conjugated with a novel, proprietary small molecule, which was derived from 10 years of work in the MIT labs of Professors Robert Langer and Daniel Anderson. This work culminated in a series of patents and patent applications to which we obtained exclusive rights through our license agreement with MIT. The spheres are designed to prevent the generation of an immune response against the spheres encapsulating the cells while enabling nutrient influx and therapeutic protein efflux.

Modularity, a key attribute of our SLTx platform, is comprised of three core 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 for a specific cell line, from raw materials to processing steps, can be shared across our development programs using such cell line, enabling a potentially streamlined path from discovery to clinical trials. This modularity has created an efficient engine for generation of product candidates.

Our programs and most advanced product candidates are outlined below:

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, a global leader in diabetes, 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 IND submission readiness and Lilly will develop and commercialize the program worldwide. We expect to conduct IND-enabling studies for SIG-002 in 2023, with an expected IND submission in 2024.

MPS-1: We are also developing product candidates for the treatment of lysosomal diseases. We believe our product candidates for lysosomal diseases, including mucopolysaccharidosis type 1, or MPS-1, 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. For example, our program for MPS-1 consists of product candidates that contain a cell line that is genetically modified with a nonviral vector to express human α-L-iduronidase, or IDUA, encapsulated within our spheres. In addition, we are designing our product candidates to address the neurological manifestations of certain lysosomal diseases, using molecules designed to penetrate the blood brain barrier and molecules designed to extend plasma half-life. In the first quarter of 2023, we decreased our external spend relating to our MPS-1 program to preserve capital.

We expect to expand our pipeline of product candidates to include expansion areas of development, including liver disease and other validated targets, in the future.

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.

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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.

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;

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●

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.

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:

●

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;

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●

the receipt and related terms of regulatory approvals from applicable regulatory authorities;

●

the availability of raw materials for use in the 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.

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 if we increase our headcount to support our continued research activities and development of our product candidates. We also anticipate that we will continue to incur significant 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.

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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, net

Other income consists primarily of sublease income, gain on the disposal of fixed assets and net foreign exchange losses.

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, 2023 or 2022.

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 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 14, 2023, 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, 2022 filed with the SEC on March 14, 2023.

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Results of Operations

Comparison of the Three Months ended March 31, 2023 and 2022

The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022:


	Three Months Ended
	March 31,				Increase
	2023		2022		(Decrease)

	(in thousands)
Revenue
Collaboration revenue	$	4,858	$	3,165	$	1,693
Operating expenses:
Research and development		7,782		11,618		(3,836)
General and administrative		4,323		5,024		(701)
Total operating expenses		12,105		16,642		(4,537)
Loss from operations		(7,247)		(13,477)		6,230
Other income (expense):
Interest income		476		64		412
Interest expense		(611)		(491)		(120)
Other expense		4		45		(41)
Total other expense, net		(131)		(382)		251
Net loss and comprehensive loss	$	(7,378)	$	(13,859)	$	6,481

Revenue

Revenue was $4.9 million for the three months ended March 31, 2023, compared to $3.2 million for the three months ended March 31, 2022. The increase in revenue of $1.7 million was primarily due to the timing of the costs of the activities performed under the 2018 Lilly Agreement. We recognize revenue under the 2018 Lilly Agreement based on the input method. During the three months ended March 31, 2023, we incurred $1.4 million more in expenses than the three months ended March 31, 2022. Further, both the total estimated costs and total estimated consideration expected to be received as of March 31, 2023 increased from December 31, 2022.

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2023 and 2022:


	Three Months Ended
	March 31,		Increase
	2023	2022	(Decrease)

	(in thousands)
Direct research and development expenses by program:
Diabetes program