Cartesian Therapeutics, Inc. 10-K

Item 7. 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 our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A. “Risk Factors.” A discussion of the year ended December 31, 2020 compared to the year ended December 31, 2019 has been reported previously in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 12, 2021, under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Overview We are a clinical-stage biopharmaceutical company. Our ImmTOR® platform encapsulates rapamycin, also known as sirolimus, an FDA approved immunomodulator, in biodegradable nanoparticles ImmTOR is designed to induce antigen-specific immune tolerance. We continually seek to enhance ImmTOR. In recent preclinical studies we have conducted, we have observed that ImmTOR may have synergistic activity with interleukin-2, or IL-2, molecules that have been engineered to be selective for regulatory T cells, or Tregs. Treg-selective IL-2 mutant molecules, or IL-2 muteins, have been shown to transiently expand all pre-existing Tregs in preclinical studies conducted by others. We have observed in preclinical studies that the combination of ImmTOR, a Treg-selective IL-2 mutein and an antigen elicited an approximately three-fold increase in antigen-specific Tregs beyond ImmTOR alone with evidence of enhanced durability of immune tolerance and the potential for ImmTOR dose sparing. This combination of ImmTOR with a Treg selective IL-2 molecule represents an evolution of the ImmTOR platform, which we call ImmTOR-IL ™ . We believe this combination has the potential to be a best-in-class therapy in diseases where expansion of total Tregs may prove beneficial. We believe ImmTOR and ImmTOR-IL have the potential to enhance both the efficacy and safety of biologic therapies (including gene therapies), improve product candidates under development, and enable novel therapeutic modalities in autoimmune disease. In clinical trials, ImmTOR has been observed to inhibit the formation of neutralizing antibodies to adeno-associated virus (AAV) capsids, potentially enabling re-dosing of gene therapies. Additionally, based on preclinical data in AAV gene therapies, we believe that ImmTOR has the potential to improve efficacy and safety by increasing transgene expression, reducing hepatic inflammation and inhibiting undesired immune responses to both the AAV capsid and the transgene product that can occur with the first dose of gene therapy. In biologic therapies, clinical activity of ImmTOR in humans has been observed with pegadricase, a highly immunogenic pegylated uricase enzyme being developed for the treatment of patients with chronic refractory gout to conventional therapy. The combination of ImmTOR and pegadricase is currently being evaluated in a Phase 3 clinical trial that we are conducting on behalf of our partner Swedish Orphan Biovitrum AB, or Sobi. We intend to pursue development of therapies for autoimmune diseases where expansion of either all Tregs or antigen-specific Tregs has been shown to, or we believe is, likely to have a beneficial effect. We believe that ImmTOR and ImmTOR-IL have the potential to unlock antigen-specific therapies for autoimmune diseases and that ImmTOR-IL can further improve the efficacy and safety profile of biologic therapies beyond ImmTOR alone. Impact of COVID-19 We are closely monitoring how the COVID-19 pandemic is affecting our employees, business, preclinical studies and clinical trials. In response to the spread of COVID-19, we have continued to have our administrative employees work outside of our offices and limited the number of staff in any given research and development laboratory. Disruptions caused by the COVID-19 pandemic may result in difficulties or delays in initiating, enrolling, conducting or completing our planned and ongoing clinical trials, and the incurrence of unforeseen costs as a result of preclinical study or clinical trial delays. While the COVID-19 pandemic has not had a material impact on our clinical programs as of the date of this Annual Report, it could have an impact on our ability to complete the Phase 3 DISSOLVE clinical program of SEL-212, as the pandemic presents the potential to experience delays in enrollment as well as the inability of certain patients to complete the trial due to suffering from COVID-19, our ability to commence preclinical studies and clinical trials of our IgA nephropathy, gene therapy, and autoimmune disease programs, and our ability to obtain supply of both active drug substances and finished drug product as well as efficient execution of the overall supply chain for SEL-212 and our other programs. At this time, any impact of COVID-19 on our business, revenues, results of operations and financial condition will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, the emergence of new virus variants, travel restrictions and social distancing in the United States and other countries, business closures or disruptions, supply chain disruptions, the ultimate impact on financial markets and the global economy, and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. 60 Table of Contents Financial Operations To date, we have financed our operations primarily through public offerings and private placements of our securities, funding received from research grants, collaboration and license arrangements and our credit facility. We do not have any products approved for sale and have not generated any product sales. Since inception, we have incurred significant operating losses. We incurred net losses of $25.7 million and $68.9 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, we had an accumulated deficit of $430.3 million. We expect to continue to incur significant expenses and operating losses for at least the next several years as we: • continue the research and development of our other product candidates as well as product candidates that we may be developing jointly with collaboration partners; • seek to enhance our ImmTOR platform and discover and develop additional product candidates; • seek to enter into collaboration, licensing and other agreements, including, but not limited to research and development, and/or commercialization agreements; • seek regulatory approvals for any product candidates that successfully complete clinical trials; • potentially establish a sales, marketing and distribution infrastructure and scales-up external manufacturing capabilities to commercialize any products for which we may obtain regulatory approval; • maintain, expand and protect our intellectual property portfolio, including through licensing arrangements; and • add clinical, scientific, operational, financial and management information systems and personnel, including personnel to support our product development and potential future commercialization efforts and to support our operations as a public company. Until we can generate substantial product revenues, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, and license and collaboration agreements. We may be unable to raise capital when needed or on reasonable terms, if at all, which would force us to delay, limit, reduce or terminate our product development or future commercialization efforts. We will need to generate significant revenues to achieve profitability, and we may never do so. We believe that our existing cash, cash equivalents, restricted cash, and marketable securities as of December 31, 2021 will enable us to fund our operating expenses and capital expenditure requirements into the third quarter of 2023. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. The consolidated financial information presented below includes the accounts of Selecta Biosciences, Inc. and our wholly owned subsidiaries, Selecta (RUS) LLC, a Russian limited liability company, or Selecta (RUS), and Selecta Biosciences Security Corporation, a Massachusetts securities corporation. All intercompany accounts and transactions have been eliminated. Collaboration and license revenue To date, we have not generated any revenue from product sales. Our revenue consists primarily of collaboration and license revenue, which includes amounts recognized related to upfront and milestone payments for research and development funding under collaboration and license agreements. We expect that any revenue we generate will fluctuate from quarter to quarter because of the timing and amounts of fees, research and development reimbursements and other payments from collaborators. We do not expect to generate revenue from product sales for at least the next several years. If we or our collaborators fail to complete the development of our product candidates in a timely manner or fail to obtain regulatory approval as needed, our ability to generate future revenue will be harmed, and will affect the results of our operations and financial position. For a further description of the agreements underlying our collaboration and license revenue, see Notes 2 and 12 to our consolidated financial statements included elsewhere in this Annual Report. Research and development Our research and development expenses consist of external research and development costs, which we track on a program-by-program basis and primarily include CMO-related costs, fees paid to CROs and internal research and development costs, which are primarily compensation expenses for our research and development employees, lab supplies, analytical testing, allocated overhead costs and other related expenses. Our internal research and development costs are often devoted to expanding our programs and are not necessarily allocable to a specific target. We have incurred a total of $364.0 million in research and development expenses from inception through December 31, 2021, with a majority of the expenses being spent on the development of SEL-212 and the remainder being spent on our various discovery and preclinical stage product candidate programs and the general expansion of our technology. 61 Table of Contents We expense research and development costs as incurred. Conducting a significant amount of research and development is central to our business model. Product candidates in clinical development generally have higher development costs than those in earlier stages of development, primarily due to the size, duration and cost of clinical trials. The successful development of our clinical and preclinical product candidates is highly uncertain. Clinical development timelines, the probability of success and development costs can differ materially from our expectations. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those which we currently expect will be required for the completion of clinical development of a product candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time to complete any clinical development. The following table sets forth the components of our research and development expenses during the periods indicated (in thousands): Year Ended December 31, 2021 2020 2019 SEL-212 $ 31,446 $ 32,288 $ 25,489 AskBio collaboration 3,888 2,807 — Preclinical stage product candidate programs 11,080 1,717 1,660 Other internal research and development expenses 22,322 17,693 15,594 Total research and development expenses $ 68,736 $ 54,505 $ 42,743 In June 2020, we and Sobi entered into the Sobi License. Pursuant to the Sobi License, clinical trial costs incurred to complete development of SEL-212, including but not limited to costs incurred while conducting and completing the Phase 3 DISSOLVE trials, will be reimbursed by Sobi. These costs, when reimbursed, will be recognized as revenue consistent with the revenue recognition methodology disclosed in Note 12 to our consolidated financial statements included elsewhere in this Annual Report. The reimbursable costs exclude any costs of additional development activities required that are related to ImmTOR and that are unrelated to SEL-212. General and administrative General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, business development and support functions. Other general and administrative expenses include facility-related costs not otherwise allocated to research and development expenses, travel expenses for our general and administrative personnel and professional fees for auditing, tax and corporate legal services, including intellectual property-related legal services. Investment income Investment income consists primarily of interest income earned on our cash, cash equivalents and marketable securities. Interest expense Interest expense consists of interest expense on amounts borrowed under our credit facilities. Other income (expense) Other income was de minimis during the years ended December 31, 2021 and 2020, and for the year ended December 31, 2019 it consists primarily of issuance fees associated with warrant liabilities. Change in fair value of warrant liabilities Common warrants classified as liabilities are remeasured at fair value, utilizing a Black-Scholes valuation methodology, quarterly with the change in fair value recognized as a component of earnings. Foreign currency transaction gain (loss) The functional currency of our Russian subsidiary is the Russian ruble. In addition to holding cash denominated in Russian rubles, our Russian bank accounts also hold cash balances denominated in U.S. dollars to facilitate payments to be settled in U.S. dollars or other currencies. As of December 31, 2021 and 2020, we maintained cash of $0.3 million in Russian banks, all of which was denominated in U.S. dollars. The amounts denominated in U.S. dollars and used in transacting the day-to-day operations of our Russian subsidiary are subject to transaction gains and losses, which are reported as incurred. 62 Table of Contents Results of Operations Comparison of the Years Ended December 31, 2021 and 2020 Collaboration and license revenue The following is a comparison of collaboration and license revenue for the years ended December 31, 2021 and 2020 (in thousands, except percentages): Year Ended December 31, Increase 2021 2020 (decrease) Collaboration and license revenue $ 85,077 $ 16,597 $ 68,480 413 % During the years ended December 31, 2021 and 2020, we recognized $83.5 million and $16.6 million, respectively, under the license agreement with Sobi resulting from both the shipment of clinical supply and the reimbursement of costs incurred for the Phase 3 DISSOLVE clinical program. The significant revenue increase is the result of the continued enrollment of the Phase 3 DISSOLVE clinical program that was initiated in the third quarter of 2020. Additionally, during the year ended December 31, 2021, we recognized $1.0 million under the license agreement with Takeda, $0.4 million for shipments under the license agreement with Sarepta, and $0.1 million resulting from the expiration of the contractual audit term under the Skolkovo Foundation grant. Research and development The following is a comparison of research and development expenses for the years ended December 31, 2021 and 2020 (in thousands, except percentages): Year Ended December 31, Increase 2021 2020 (decrease) SEL-212 $ 31,446 $ 32,288 $ (842) (3) % AskBio collaboration 3,888 2,807 1,081 39 % Preclinical stage product candidate programs 11,080 1,717 9,363 545 % Other internal research and development expenses 22,322 17,693 4,629 26 % Total research and development expenses $ 68,736 $ 54,505 $ 14,231 26 % During the year ended December 31, 2021 , our research and development expenses increased by $14.2 million, or 26%, as com pared to 2020. The increase in cost was primarily the result of expenses incurred for the preclinical programs, salaries for increases in headcount and AskBio collaboration costs. Additionally, we paid Genovis and Ginkgo, $4.0 million and $0.5 million, respectively, for in-license agreements. General and administrative The following is a comparison of general and administrative expenses for the years ended December 31, 2021 and 2020 (in thousands, except percentages): Year Ended December 31, Increase 2021 2020 (decrease) General and administrative $ 20,938 $ 18,913 $ 2,025 11 % During the year ended December 31, 2021, our general and administrative expenses increased by $2.0 million, or 11%, as compared to 2020. The increase in costs was primarily the result of stock compensation and consulting fees, offset primarily by reduction in professional fees. Investment income Investment income was de minimis for the years ended December 31, 2021 and 2020, respectively. Loss on extinguishment of debt For the year ended December 31, 2020, we recognized a $0.5 million loss on extinguishment of the 2017 Term Loan (see Note 9). 63 Table of Contents Foreign currency transaction gain (loss) We recognized de minimis foreign currency gains during each of the years ended December 31, 2021 and 2020. Interest expense Interest expense was $2.8 million and $1.6 million for the years ended December 31, 2021 and 2020, respectively, representing interest expense and amortization of the carrying costs of our credit facilities. Change in fair value of warrant liabilities For the year ended December 31, 2021, we recognized $2.3 million of loss from the change in the fair value of warrant liabilities utilizing the Black-Scholes valuation methodology. The increase in value was primarily driven by a slight increase in the Company’s share price, offset by the decrease of outstanding warrants. For the year ended December 31, 2020, we recognized $10.4 million change for the increase in the fair value of warrant liabilities primarily driven by an increase in the share price and volatility. Other income (expense) Other income (expense) was de minimis for each of the years ended December 31, 2021 and 2020. Income taxes For the year ended December 31, 2021, we recognized $16.0 million of expense for the income taxes primarily related to the license agreement with Sobi upon the Company’s election to opt out of the installment sale method of taxation. As a result of this election, the Company has prepaid all taxes related to future Sobi License revenue streams. Net loss Net loss for the year ended December 31, 2021 decreased to $25.7 million as compared to a net loss of $68.9 million in 2020 primarily due to increased revenue of $66.9 million under the license agreement with Sobi resulting from both the shipment of clinical supply and the reimbursement of costs incurred for the Phase 3 DISSOLVE clinical program, partially offset by increased research and development expenses on preclinical programs. Liquidity and Capital Resources Since our inception, we have incurred recurring net losses. We expect that we will continue to incur losses and that such losses will increase for the foreseeable future. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need additional capital to fund our operations, which we may raise through a combination of equity offerings, debt financings, third-party funding and other collaborations and strategic alliances. From our inception through December 31, 2021, we have raised an aggregate of $637.5 million to fund our operations, which includes $118.5 million from the sale of preferred stock, $11.1 million in government grant funding, $36.7 million from borrowings under our credit facilities past and present, $202.4 million from our collaborations and license agreements, $64.5 million in combined net proceeds from our initial public offering, $149.3 million in combined net proceeds from private placements and follow-on offerings of our common stock, and, through December 31, 2021, $55.0 million in aggregate net proceeds from “at-the-market” offerings of our common stock. As of December 31, 2021, our cash, cash equivalents, restricted cash, and marketable securities were $129.4 million, of which $1.4 million was restricted cash related to lease commitments and $0.3 million was held by our Russian subsidiary designated solely for use in its operations. Our Russian subsidiary cash is consolidated for financial reporting purposes. In addition to our existing cash equivalents, we receive research and development funding pursuant to our collaboration and license agreements. Currently, funding from payments under our collaboration and license agreements represent our only source of committed external funds. Collaboration and License Agreements In-licenses In October 2021, we entered into the Ginkgo Agreement, and paid Ginkgo a $0.5 million one-time upfront payment and we entered into the Genovis Agreement, and paid Genovis a $4.0 million one-time upfront payment. On September 7, 2021, we entered into the Cyrus Agreement, and purchased 2,326,934 shares of Cyrus’ Series B Preferred Stock, par value $0.0001 per share at a purchase price of $0.8595 per share for $2.0 million. Out-licenses 64 Table of Contents On October 1, 2021, we entered into the Takeda Agreement. We received a $3.0 million upfront payment and are entitled to receive up to $1.124 billion in future additional payments over the course of the partnership that are contingent on the achievement of development or commercial milestones or Takeda’s election to continue its activities at specified development stages. In June 2020, we entered into the Sobi License. Sobi paid us a one-time, upfront payment of $75 million, and upon the closing of the Sobi Private Placement, we received an additional $25 million from Sobi in consideration for Sobi’s purchase of our common stock at $4.6156 per share. We are eligible to receive $630 million in milestone payments upon the achievement of various development and regulatory milestones and sales thresholds for annual net sales of SEL-212, and tiered royalty payments ranging from the low double digits on the lowest sales tier to the high teens on the highest sales tier. Sobi has agreed to fund the Phase 3 clinical program of SEL-212, which commenced in September 2020. We expect this to substantially reduce our annual operating expenses. Additionally, in June 2020, we entered into the Sarepta Agreement. Sarepta paid us a $2.0 million upfront payment upon closing, and a $3.0 million for the achievement of certain pre-clinical milestones in June 2021. In December 2019, we entered into the AskBio License Agreement. Pursuant to the AskBio License Agreement, AskBio has exercised its option to exclusively license intellectual property rights covering ImmTOR to research, develop, and commercialize certain AAV gene therapy products utilizing ImmTOR, and targeting the GAA gene, or derivatives thereof, to treat Pompe Disease. We received $7.0 million of upfront fees pursuant to the AskBio License Agreement and are eligible to receive $237 million in milestone payments, and royalties on net sales ranging from the mid-to-high single digits. Financings In August 2017, we entered into a sales agreement, or the 2017 Sales Agreement, with Jefferies LLC, as sales agent, to sell shares of our common stock with an aggregate value of up to $50.0 million in an “at-the-market” offering. In August 2020, concurrent with the filing of a new shelf registration statement, we entered into a new sales agreement, or the 2020 Sales Agreement, with Jefferies LLC, as sales agent, pursuant to which we may, from time to time, issue and sell common stock with an aggregate value of up to $50.0 million in an “at-the-market” offering. The 2017 Sales Agreement terminated pursuant to its terms in August 2020. On October 8, 2021, we delivered notice to Jefferies LLC that we were terminating the 2020 Sales Agreement, with effect as of October 19, 2021. On October 25, 2021, we entered into a Sales Agreement, or the 2021 Sales Agreement, with SVB Leerink LLC to sell shares of our common stock, from time to time, through an “at the market” equity offering program under which SVB Leerink will act as sales agent. The shares of common stock sold pursuant to the 2021 Sales Agreement will be issued pursuant to our shelf registration statement on Form S-3 (File No. 333-241692), filed on August 6, 2020 with the Securities and Exchange Commission and related prospectus supplement, filed on October 25, 2021 with the Securities and Exchange Commission, for aggregate gross sales proceeds of up to $75.0 million. During the year ended December 31, 2021, we sold 13,767,511 shares of our common stock pursuant to the 2021 and 2020 Sales Agreements, as applicable, for aggregate net proceeds of $51.9 million, after deducting commissions and other transaction costs. During the year ended December 31, 2020, we sold 1,069,486 shares of our common stock pursuant to the 2020 and 2017 Sales Agreements, as applicable, for aggregate net proceeds of $2.1 million, after deducting commissions and other transaction costs. Indebtedness On August 31, 2020, we entered into a term loan of up to $35.0 million, consisting of term loans in an aggregate amount of $25.0 million, or the Term A Loan, and term loans in an aggregate amount of $10.0 million, or the Term B Loan, governed by a loan and security agreement among us and Oxford Finance LLC, or Oxford, as collateral agent and a lender, and Silicon Valley Bank, or SVB, as a lender. The Term A Loan was funded in full on August 31, 2020, the proceeds of which were used to repay our previously existing 2017 Term Loan and for general corporate and working capital purposes. The second draw period expired on September 30, 2021 and the Term B Loan is no longer available to be drawn in the future. The 2020 Term Loan is secured by a lien on substantially all of our assets, other than intellectual property, provided that such lien on substantially all assets includes any rights to payments and proceeds from the sale, licensing or disposition of intellectual property. We also granted Oxford a negative pledge with respect to our intellectual property. The 2020 Term Loan contains customary covenants and representations, including but not limited to financial reporting obligations and limitations on dividends, indebtedness, collateral, investments, distributions, transfers, mergers or acquisitions, taxes, corporate changes, deposit accounts, and subsidiaries. The 2020 Term Loan also contains other customary provisions, such as expense reimbursement, non-disclosure obligations as well as indemnification rights. The events of default under the 2020 Term Loan include, but are not limited to, our failure to make any payments of principal or interest under the 2020 Term Loan or other transaction documents, our breach or default in the performance of any covenant under the 2020 Term Loan or other transaction documents, the occurrence of a material adverse event, making a false or misleading representation or warranty in any material respect under the 2020 Term Loan, our insolvency or bankruptcy, any attachment or judgment on our assets of at least approximately $0.5 million, or the occurrence of any default under any of our 65 Table of Contents agreements or obligations involving indebtedness in excess of approximately $0.5 million. If an event of default occurs, Oxford and SVB are entitled to take enforcement action, including acceleration of amounts due under the 2020 Term Loan. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility. For a further description of the 2020 Term Loan, see Note 9 to our consolidated financial statements included elsewhere in this Annual Report. Future funding requirements As of the date of this Annual Report, we have not generated any revenue from product sales. We do not know when, or if, we will generate revenue from product sales. We will not generate significant revenue from product sales unless and until we obtain regulatory approval and commercialize one of our current or future product candidates. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical research and development services, laboratory and related supplies, clinical costs, legal and other regulatory expenses, and general overhead costs. We expect that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to risks in the development of our products, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We expect that we will need substantial additional funding to support our continuing operations. As of December 31, 2021, we had an accumulated deficit of $430.3 million. We anticipate operating losses to continue for the foreseeable future due to, among other things, costs related to research, development of our product candidates, conducting preclinical studies and clinical trials, and our administrative organization. We will require substantial additional financing to fund our operations and to continue to execute our strategy, and we will pursue a range of options to secure additional capital. We are continually evaluating various potential sources of additional funding such as strategic collaborations, license agreements and the issuance of equity to fund our operations. If we raise additional funds through strategic collaborations and alliances, which may include existing collaboration partners, we may have to relinquish valuable rights to our technologies or product candidates, or grant licenses on terms that are not favorable to us. To the extent that we raise additional capital through the sale of equity, the ownership interest of our existing shareholders will be diluted, and other preferences may be necessary that adversely affect the rights of existing shareholders. We believe that our existing cash, cash equivalents, restricted cash, and marketable securities as of December 31, 2021 will enable us to fund our current planned operations into the third quarter of 2023, though we may realize additional cash resources upon the achievement of certain contingent collaboration milestones or it may pursue additional cash resources through public or private equity or debt financings or by establishing collaborations with other companies. Management’s expectations with respect to our ability to fund current and long-term planned operations are based on estimates that are subject to risks and uncertainties. If actual results are different from management’s estimates, we may need to seek additional strategic or financing opportunities sooner than would otherwise be expected. However, there is no guarantee that any collaboration milestones will be achieved or that any of these strategic or financing opportunities will be executed on favorable terms, and some could be dilutive to existing stockholders. If we are unable to obtain additional funding on a timely basis, we may be forced to significantly curtail, delay, or discontinue one or more of its planned research or development programs or be unable to expand our operations, meet long-term obligations or otherwise capitalize on our commercialization of our product candidates. Additionally, while the potential economic impact brought by and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital as and when needed. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our future capital requirements will depend on many factors, including: • the number of product candidates that we pursue; • our collaboration agreements remaining in effect, our entering into additional collaboration agreements and our ability to achieve milestones under these agreements; • the cost of manufacturing clinical supplies of our product candidates; • our headcount growth and associated costs; • the scope, progress, results and costs of preclinical development, laboratory testing and clinical trials for our other product candidates; • the costs, timing and outcome of regulatory review of our product candidates; • the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; 66 Table of Contents • the revenue, if any, received from commercial sales of our product candidates for which we receive marketing approval; • the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; • the effect of competing technological and market developments; and • the extent to which we acquire or invest in businesses, products and technologies, including entering into licensing or collaboration arrangements for product candidates. Summary of Cash Flows Year Ended December 31, (In thousands) 2021 2020 2019 Cash (used in) and provided by: Operating activities $ (60,382) $ 34,881 $ (51,435) Investing activities (17,140) (741) 229 Financing activities 52,897 14,431 105,041 Effect of exchange rate changes on cash (3) (58) 34 Net change in cash, cash equivalents, and restricted cash $ (24,628) $ 48,513 $ 53,869 Operating activities Net cash used in operating activities for the year ended December 31, 2021 was $60.4 million compared to $34.9 million provided in the same period in 2020. The decrease in net cash used in operating activities was primarily due to $12.2 million of net losses, adjusted for non-cash items, and uses of cash of approximately $48.2 million for changes in operating assets and liabilities. Investing activities Net cash used in investing activities for the year ended December 31, 2021 was $17.1 million compared to net cash used in investing activities of $0.7 million in the same period in 2020. The net cash used in investing activities in 2021 was primarily to purchase marketable securities and to invest in Cyrus Biotechnology, offset by proceeds from the maturities of marketable securities. The net cash used in investing activities in 2020 was to purchase property and equipment. Financing activities Net cash provided by financing activities for the year ended December 31, 2021 was $52.9 million compared to net cash provided by financing activities of $14.4 million in the same period in 2020. The net cash provided by financing activities in 2021 was primarily the result of net proceeds from “ at-the-market ” offerings and from the exercise of stock options. The net cash provided by financing activities in 2020 was the result of $10.3 million from the Sobi Private Placement, $24.7 million from the Term A Loan, $2.1 million net proceeds from sales of common stock in “at-the-market” offerings, and $1.0 million proceeds from warrant exercises, offset by $4.4 million of issuance costs paid for December 2019 financing and $19.3 million principal payment on outstanding debt. Research and development contract obligations Under our license agreement with MIT, milestone payments are due upon the occurrence of certain events and royalty payments commence upon our commercialization of a product. As of December 31, 2021, contractual obligations were $0.4 million. We have assumed license payments are fully offset by royalty payments in 2028. Recent Accounting Pronouncements For a discussion of recently adopted or issued accounting pronouncements please see Note 2 to our consolidated financial statements included elsewhere in this Annual Report. Off-Balance Sheet Arrangements As of December 31, 2021, we did not have any off-balance sheet arrangements as defined in the rules and regulations of the Securities and Exchange Commission. 67 Table of Contents Critical Accounting Policies and Use of Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities in our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions and could have a material impact on our reported results. While our significant accounting policies are more fully described in the Notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements: Revenue Recognition Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Pursuant to ASC Topic 606, Revenue from Contracts with Customers (ASC 606) , a customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) determine the transaction price, including the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy each performance obligation. We only apply the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. If a promised good or service is not distinct, it is combined with other performance obligations. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For example, certain performance obligations associated with Swedish Orphan Biovitrum, or Sobi, Asklepios Biopharmaceutical, Inc., or AskBio, Sarepta Therapeutics, Inc., or Sarepta, and Takeda Pharmaceuticals USA, Inc., or Takeda, (see Note 12) will be satisfied over time, and revenue will be recognized using the output method, based on the proportion of actual deliveries to the total expected deliveries over the initial term. Collaboration and License Revenue: We currently generate revenue through collaboration and license agreements with strategic collaborators for the development and commercialization of product candidates. Collaboration and license agreements with customers are generally accounted for in accordance with ASC 606. We analyze collaboration arrangements by first assessing whether they are within the scope of ASC Topic 808, Collaborative Arrangements (ASC 808 ), and evaluate whether such arrangements involve joint operating activities performed by parties that are both active participants in the activities and exposed to significant risks and rewards that are dependent on the commercial success of such activities. Collaboration agreements with customers that are not within the scope of ASC 808 are accounted for in accordance with ASC 606. To the extent the collaboration agreement is within the scope of ASC 808, we also assess whether any aspects of the agreement are within the scope of other accounting literature (specifically ASC 606). If we conclude that some or all aspects of the agreement are distinct and represent a transaction with a customer, we account for those aspects of the arrangement within the scope of ASC 606. We recognize the shared costs incurred that are not within the scope of other accounting literature as a component of the related expense in the period incurred by analogy to ASC Topic 730, Research and Development (ASC 730) , and record reimbursements from counterparties as an offset to the related costs. In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the agreements in accordance with ASC 606, we perform the five steps above. As part of the accounting for the arrangement, we must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. We use key assumptions to determine the stand-alone selling price, which may include market conditions, reimbursement rates for personnel costs, development timelines and probabilities of regulatory success. The assumptions used to determine the stand-alone selling price and our satisfaction of performance obligations have a material effect on our collaboration and license revenue and may prove to be wrong. The terms of our arrangements typically include one or more of the following: (i) upfront fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; (iii) royalties on net sales of licensed products; (iv) reimbursements or cost-sharing of research and development (R&D) expenses; and (v) profit/loss sharing arising from co-promotion arrangements. Licenses of Intellectual Property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from non-refundable, upfront fees allocated to the license when the license is transferred to the customer and the customer is able to use and benefit from the license. If not distinct, the license is combined with other performance obligations in the contract. For licenses that are combined with other performance obligations, we assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring 68 Table of Contents progress for purposes of recognizing revenue. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition. Optional licenses are evaluated to determine if they are issued at a discount, and therefore, represent material rights and should be accounted for as separate performance obligations. Milestone Payments: At the inception of each arrangement that includes developmental and regulatory milestone payments, we evaluate whether the achievement of each milestone specifically relates to our efforts to satisfy a performance obligation or transfer a distinct good or service within a performance obligation. If the achievement of a milestone is considered a direct result of our efforts to satisfy a performance obligation or transfer a distinct good or service and the receipt of the payment is based upon the achievement of the milestone, the associated milestone value is allocated to that distinct good or service. If the milestone payment is not specifically related to our efforts to satisfy a performance obligation or transfer a distinct good or service, the amount is allocated to all performance obligations using the relative standalone selling price method. We also evaluate the milestone to determine whether they are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price to be allocated, otherwise, such amounts are constrained and excluded from the transaction price. At the end of each subsequent reporting period, we re-evaluate the probability of achievement of such development milestones and any related constraint, and if necessary, adjust our estimate of the transaction price. Any such adjustments to the transaction price are allocated to the performance obligations on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price changes. Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the customer’s discretion are evaluated to determine if they are distinct and optional. For optional services that are distinct, we assess if they are priced at a discount, and therefore, provide a material right to the licensee to be accounted for as separate performance obligations. Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we will recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied) in accordance with the royalty recognition constraint. Clinical Trial Costs Clinical trial expenses are a significant component of research and development expenses, and we outsource a significant portion of these costs to third parties. Third party clinical trial expenses include patient costs, clinical research organization costs and costs for data management. The accrual for site and patient costs includes inputs such as estimates of patient enrollment, patient cycles incurred, clinical site activations, and other pass-through costs. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected on the consolidated balance sheets as a prepaid asset or accrued clinical trial cost. These third party agreements are generally cancellable, and related costs are recorded as research and development expenses as incurred. Non-refundable advance clinical payments for goods or services that will be used or rendered for future R&D activities are recorded as a prepaid asset and recognized as expense as the related goods are delivered or the related services are performed. We also record accruals for estimated ongoing clinical research and development costs. When evaluating the adequacy of the accrued liabilities, we analyze progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by us materially affecting our results of operations. The historical clinical accrual estimates made by us have not been materially different from the actual costs. Warrant Liabilities In December 2019, we issued common warrants in connection with a securities purchase agreement between us and a group of institutional investors and certain members of our board of directors. Pursuant to the terms of these common warrants, we could be required to settle the common warrants in cash in the event of certain acquisitions of us and, as a result, the common warrants are required to be measured at fair value and reported as a liability on the balance sheet. We recorded the fair value of the common warrants of $40.7 million upon issuance using the Black-Scholes valuation model, and are required to revalue the common warrants at each reporting date with any changes in fair value recorded on our statement of operations. Inputs used to determine estimated fair value of the common warrant liabilities include the estimated fair value of the underlying stock at the valuation date, the estimated term of the warrants, risk-free interest rates, expected dividends and the expected volatility of the underlying stock. The estimates used to determine the fair value of these common warrants represent our best estimates, but may prove to be wrong. Therefore, the change in fair value of warrant liabilities could be materially different in the future. Stock-Based Compensation 69 Table of Contents We account for all stock-based compensation granted to employees and non-employees using a fair value method. Stock-based compensation is measured at the grant date fair value and is recognized over the requisite service period of the awards, usually the vesting period, on a straight-line basis, net of estimated forfeitures. To the extent that actual forfeitures differ from our estimates, the differences are recorded as a cumulative adjustment in the period the estimates were adjusted. Stock-based compensation expense recognized in the consolidated financial statements is based on awards that ultimately vest. The assumptions used in determining the fair value of stock-based awards represent our best estimates, but the estimates involve inherent uncertainties and the application of our judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different in the future. Smaller Reporting Company We qualify as a “smaller reporting company” under the rules of the Securities Act and the Exchange Act. As a result, we may choose to take advantage of certain scaled disclosure requirements available specifically to smaller reporting companies. We will remain a smaller reporting company until the last day of the fiscal year in which the aggregate market value of our common stock held by non-affiliated persons and entities, or our public float, is more than $700 million as of the last business day of our most recently completed second fiscal quarter, or the last day of the fiscal year in which we have at least $100 million in revenue and at least $250 million in public float as of the last business day of our most recently completed second fiscal quarter.