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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended March 31, 2022


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

For the transition period from ___________________ to ___________________

Commission File Number: 001-41374

PEPGEN INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware	85-3819886
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
245 Main Street Cambridge, Massachusetts	02142
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 797-0979

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, par value $0.0001 per share

PEPG

Nasdaq Global Select Market

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, 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 June 16, 2022, the registrant had 23,631,924 of common stock, $0.0001 par value per share, outstanding.

SUMMARY OF MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS

Our business is subject to numerous risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:

•

We have incurred significant losses since our inception, have no products approved for sale and we expect to incur losses for the foreseeable future.

•

We will need to raise substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, scale back, or discontinue our product development programs or future commercialization efforts.

•

We are very early in our development efforts. We have only advanced one product candidate into clinical development, and as a result it will be years before we commercialize a product candidate, if ever. If we are unable to advance our product candidates through preclinical studies and clinical trials, obtain marketing approval and ultimately commercialize them, or experience significant delays in doing so, our business will be materially harmed.

•

Our business is highly dependent on the clinical advancement of our programs and modalities and is especially dependent on the success of our lead product candidates, EDO51 and EDODM1. Delay or failure to advance programs or modalities, including EDO51 and EDODM1 could adversely impact our business.

•

Preclinical and clinical development involves a lengthy and expensive process with an uncertain outcome, and the results of preclinical studies are not necessarily predictive of the results of later preclinical studies and any clinical trials of our product candidates. We have only entered clinical trials for one of our product candidates and our product candidates may not have favorable results in clinical trials, if any, or receive regulatory approval on a timely basis, if at all.

•

Substantial delays in the commencement, enrollment or completion of our planned clinical trials or failure to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities could prevent us from commercializing any product candidates we determine to develop on a timely basis, if at all.

•

We rely, and expect to continue to rely, on third parties to conduct some or all aspects of our product manufacturing, research and preclinical and clinical testing, and these third parties may not perform satisfactorily or, dedicate adequate resources to meet our needs, or may be unable to acquire the necessary supplies to perform successfully.

•

We face significant competition, and if our competitors develop technologies or product candidates more rapidly than we do or their technologies or product candidates are more effective or have more favorable safety or tolerability profiles, our business and our ability to develop and successfully commercialize products may be adversely affected.

•

If we are unable to obtain and maintain patent protection for our EDO platform, therapeutic development candidates or programs and/or other proprietary technologies we develop, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our therapeutic product candidates or programs and other proprietary technologies we may develop may be adversely affected.

•

We expect to expand our development and regulatory capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.

•

Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.

•

The price of our common stock may be volatile and fluctuate substantially, which could result in substantial losses for holders of our common stock.

The summary risk factors described above should be read together with the text of the full risk factors below in the section titled “Risk Factors” in Part II, Item 1.A. and the other information set forth in this Quarterly Report on Form 10-Q, as well as in other documents that we file with the U.S. Securities and Exchange Commission (SEC). The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not precisely known to us, or that we currently deem to be immaterial, may also materially adversely affect our business, financial condition, results of operations and future growth prospects.

Table of Contents


		Page

PART I.	FINANCIAL INFORMATION	3

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Loss	5
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II.	OTHER INFORMATION	27

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88
Item 3.	Defaults Upon Senior Securities	88
Item 4.	Mine Safety Disclosures	88
Item 5.	Other Information	88
Item 6.	Exhibits	90
Signatures		91

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or 10-Q contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management and which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, or the or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this 10-Q include, but are not limited to, statements about:


	•		the initiation, timing, progress, results, and cost of our research and development programs and our current and future preclinical studies and clinical trials, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, and the period during which the results of our clinical trials will become available;


	•		our ability to efficiently develop our existing product candidates and discover new product candidates;


	•		our ability to successfully manufacture our investigational drug substances and drug product for preclinical use, for clinical trials and on a larger scale for commercial use, if our investigational drug candidates are approved;


	•		our ability to obtain funding for our operations necessary to complete further development and commercialization of our product candidates;


	•		our ability to obtain and maintain regulatory approval of our product candidates;


	•		our ability to commercialize our products, if approved;


	•		the pricing and reimbursement of our product candidates, if approved;


	•		the implementation of our business model, and strategic plans for our business and product candidates;


	•		the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and our technology platform;


	•		estimates of our future expenses, revenues, capital requirements, and our needs for additional financing;


	•		the size and growth potential of the markets for our product candidates, and our ability to serve those markets;


	•		our financial performance;


	•		the rate and degree of market acceptance of our product candidates;


	•		regulatory developments in the United States and foreign countries;


	•		our ability to contract with third-party suppliers and manufacturers and their ability to perform adequately;


	•		our ability to produce our products or product candidates with advantages in turnaround times or manufacturing cost;


	•		the success of competing therapies that are or may become available;


	•		our ability to attract and retain key research and development or management personnel;


	•		the impact of laws and regulations;


	•		developments relating to our competitors and our industry;


	•		the effect of the ongoing COVID-19 pandemic, including mitigation efforts and economic effects, on any of the foregoing or other aspects of our business operations, including but not limited to our preclinical studies and clinical trials and any future studies or trials; and


	•		other risks and uncertainties, including those listed under the caption “Risk Factors.”

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions, and are subject to change due to known and unknown risks, uncertainties, and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section titled “Risk Factors” and elsewhere in this 10-Q. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. You should read this 10-Q and the documents that we reference in this 10-Q and have filed with the Securities and Exchange Commission completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this 10-Q represent our views as of the date of this 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable 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 10-Q.

In addition, statements that ‘‘we believe’’ and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain.

This 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for our programs and product candidates. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from our own internal estimates and research as well as from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. While we are not aware of any misstatements regarding any third-party information presented in this 10-Q, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties and are subject to change based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this 10-Q.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

PEPGEN INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PAR VALUE AMOUNTS)

(UNAUDITED)


	March 31, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	118,854		$	132,895
Other receivables		4,574			4,744
Prepaid expenses and other current assets		2,240			2,347
Total current assets	$	125,668		$	139,986
Property and equipment, net		2,569			636
Other assets		3,642			3,019
Total assets	$	131,879		$	143,641
Liabilities, convertible preferred stock, and stockholders’ deficit
Current liabilities:
Accounts payable (including related party amounts of $14 and $33, respectively)	$	1,888		$	3,240
Accrued expenses		14,234			7,081
Total current liabilities		16,122			10,321
Preferred stock warrant liability		168			226
Total liabilities		16,290			10,547
Commitments and contingencies
Convertible preferred stock		165,176			165,176
Stockholders’ deficit:
Class A common stock, $0.0001 par value; 16,000,000 shares authorized as of March 31, 2022 and December 31, 2021; 963,588 shares issued and outstanding as of March 31, 2022 and December 31, 2021		—			—
Additional paid-in capital		2,468			1,653
Accumulated other comprehensive (loss) income		(57	)		17
Accumulated deficit		(51,998	)		(33,752	)
Total stockholders’ deficit		(49,587	)		(32,082	)
Total liabilities, convertible preferred stock, and stockholders’ deficit	$	131,879		$	143,641

See accompanying notes to condensed consolidated financial statements.

PEPGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

(UNAUDITED)


	Three Months Ended March 31,
	2022			2021
Operating expenses:
Research and development (including related party amounts of $43 and $143, respectively)	$	10,707		$	5,530
General and administrative		3,186			1,098
Total operating expenses	$	13,893		$	6,628
Operating loss	$	(13,893	)	$	(6,628	)
Other income (expense)
Interest income	9				—
Other income (expense), net	58				(8	)
Total other income (expense), net	67				(8	)
Net loss before income tax	$	(13,826	)	$	(6,636	)
Income tax expense		(4,420	)		—
Net loss	$	(18,246	)	$	(6,636	)
Net loss per share, basic and diluted	$	(18.94	)	$	(7.42	)
Weighted-average common shares outstanding, basic and diluted		963,588			894,060

See accompanying notes to condensed consolidated financial statements.

PEPGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended March 31,
	2022			2021
Net loss	$	(18,246	)	$	(6,636	)
Cumulative translation adjustment arising during the period		(74	)		26
Comprehensive loss	$	(18,320	)	$	(6,610	)

See accompanying notes to condensed consolidated financial statements.

PEPGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(UNAUDITED)


	Series A-1 Convertible Preferred Stock				Series A-2 Convertible Preferred Stock				Series B Convertible Preferred Stock				Class A Common Stock				Additional Paid-in		Accumulated Other Comprehensive (Loss)			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Capital		Income			Deficit			Deficit
Balance as of December 31, 2021		1,372,970	$	8,454		3,939,069	$	44,639		7,234,766	$	112,083		963,588	$	—	$	1,653	$	17		$	(33,752	)	$	(32,082	)
Stock-based compensation expense		—		—		—		—		—		—		—		—	815			—			—		$	815
Net loss		—		—		—		—		—		—		—		—		—		—			(18,246	)	$	(18,246	)
Foreign currency translation adjustment		—		—		—		—		—		—		—		—		—		(74	)		—		$	(74	)
Balance as of March 31, 2022		1,372,970	$	8,454		3,939,069	$	44,639		7,234,766	$	112,083		963,588	$	—	$	2,468	$	(57	)	$	(51,998	)	$	(49,587	)

Balance as of December 31, 2020		1,372,970		8,454		700,278		7,680		—		—		894,060		—		119		(8	)		(6,471	)		(6,360	)
Stock-based compensation expense		—		—		—		—		—		—		—		—		188		—			—			188
Net loss		—		—		—		—		—		—		—		—		—		—			(6,636	)		(6,636	)
Foreign currency translation adjustment		—		—		—		—		—		—		—		—		—	26				—			26
Balance as of March 31, 2021		1,372,970	$	8,454		700,278	$	7,680		—	$	—		894,060	$	—	$	307	$	18		$	(13,107	)	$	(12,782	)

See accompanying notes to condensed consolidated financial statements.

PEPGEN INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)


	Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net loss	$	(18,246	)	$	(6,636	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		66			37
Stock-based compensation expense		815			188
Change in fair value of preferred stock warrant liability		(58	)		—
Changes in operating assets and liabilities:
Other receivables		21			77
Prepaids and other current and non-current assets		282			(351	)
Accounts payable		(1,572	)		42
Accounts payable related party		(32	)		38
Accrued expenses and other non-current liabilities		6,452			3,775
Net cash used in operating activities	$	(12,272	)	$	(2,830	)
Cash flows from investing activities:
Purchases of property and equipment		(1,614	)		(305	)
Net cash used in investing activities		(1,614	)		(305	)
Cash flows from financing activities:
Payment of deferred offering costs		(18	)		—
Net cash used in financing activities	$	(18	)	$	—
Effect of exchange rate changes on cash		(137	)	24
Net decrease in cash, cash equivalents and restricted cash	$	(14,041	)	$	(3,111	)
Cash, cash equivalents and restricted cash at beginning of period		134,368			9,778
Cash, cash equivalents and restricted cash at end of period	$	120,327		$	6,667
Components of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	118,854		$	6,667
Restricted cash		1,473			—
Total cash, cash equivalents and restricted cash at end of period	$	120,327		$	6,667
Supplemental noncash investing and financing activities
Property and equipment included in accounts payable and accrued expenses	399				—
Deferred offering costs in accounts payable and accrued expenses	766				—

See accompanying notes to condensed consolidated financial statements.

PEPGEN INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Nature of Business and Basis of Presentation

PepGen Inc., or the Company or PepGen, headquartered in Boston, Massachusetts, is a biopharmaceutical company developing a transformative oligonucleotide delivery technology and pipeline of product candidates to treat neuromuscular and neurologic diseases with a high unmet medical need.

Initial Public Offering

On May 10, 2022, the Company closed its initial public offering (IPO) in which the Company sold an aggregate of 9,000,000 shares at a public offering price of $12.00 per share for gross proceeds of $108.0 million. In connection with the IPO, the Company granted the underwriters a 30-day option to purchase 1,350,000 additional shares of common stock. On May 16, 2022, the underwriters exercised the option in part and the Company issued 1,238,951 shares of common stock for gross proceeds of $14.9 million. From the IPO and option exercise by the underwriters, the Company received approximately $122.9 million in gross proceeds and $110.2 million in net proceeds, after deducting underwriting discounts and estimated offering expenses payable by the Company.

Immediately prior to consummation of the IPO, all 12,546,805 outstanding shares of the Company’s redeemable convertible preferred stock, and 35,529 preferred stock warrants that were exercised on May 4, 2022 (see Note 3), converted into 12,359,856 shares of the Company’s common stock. As a result of this conversion, the Company's net loss per share, basic and diluted, will be significantly different in future filings.

Liquidity and Capital Resources

Since inception, the Company has not generated any revenue from product sales or other sources and has incurred significant operating losses and negative cash flows from operations. The Company’s primary uses of cash and cash equivalents to date have been to fund research and development activities, business planning, establishing and maintaining the Company’s intellectual property portfolio, hiring personnel, leasing premises and associated capital expenditures, raising capital, and providing general and administrative support for these operations. As of March 31, 2022, the Company had an accumulated deficit of $52.0 million. To date, the Company has funded operations primarily through private placements of convertible preferred stock and its IPO. As of March 31, 2022, the Company had cash and cash equivalents of $118.9 million.

As the Company continues to pursue its business plan to successfully develop and obtain regulatory approval for the Company’s product candidates, it expects to finance its operations through the sale of equity, debt financings or other capital resources, which could include income from collaborations, strategic partnerships or marketing, distribution, licensing or other strategic arrangements with third parties, or from grants. However, there can be no assurance that any additional financing or strategic transactions will be available to the Company on acceptable terms, if at all. If events or circumstances occur such that the Company does not obtain additional funding, it may need to delay, reduce or eliminate its product development or future commercialization efforts, which could have a material adverse effect on the Company’s business, results of operations or financial condition.

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in conformity with generally accepted accounting principles in the United States of America (GAAP). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (ASC) and Accounting Standards Update (ASU) of the Financial Accounting Standards Board (FASB). The condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements. Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position as of March 31, 2022, and results of operations for the interim periods ended March 31, 2022 and March 31, 2021.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements as of and for the years ended December 31, 2021 and 2020, and the notes thereto, included in the Company’s final prospectus related to the IPO, dated May 5, 2022 and filed with the Securities and Exchange Commission (the SEC) pursuant to Rule 424(b)(4) on May 9, 2022 (Final Prospectus).

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the audited financial statements for the years ended December 31, 2021 and 2020 included in the Final Prospectus. Since the date of those financial statements, there have been no changes to the Company’s significant accounting policies.

Deferred Offering Costs

The Company capitalized incremental legal, professional accounting and other third-party fees that are directly associated with the IPO as other non-current assets until the IPO was consummated. After consummation of the IPO, these costs were recorded in stockholders’ equity as a reduction of additional paid-in-capital generated as a result of the offering. As of March 31, 2022, the Company included $2.2 million in other non-current assets. The IPO was completed in May 2022 and all deferred offering costs were subsequently recorded within stockholders’ equity as a reduction of additional paid-in-capital generated from the offering.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts or existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. The Company records a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.

The Company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based on the merits of the position. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.

Restricted Cash

The Company classifies all cash whose use is limited by contractual provisions as restricted cash. Restricted cash arises from the requirement for the Company to maintain cash of $1.5 million as collateral under a lease agreement. As of March 31, 2022 and December 31, 2021, the Company had $1.5 million of restricted cash classified in other assets on the condensed consolidated balance sheets.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), The amendment relates to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use, or the ROU, assets obtained in exchange for lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of condensed consolidated financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendment is effective for the Company as of January 1, 2022. As of January 1, 2022, the Company does not have any leases with initial terms greater than twelve months that have commenced for accounting purposes. For any future leases with initial terms greater than twelve months, the Company will record a lease liability and corresponding ROU asset on is balance sheet and provide required disclosures under Topic 842.

3. Fair Value Measurements

The following tables (in thousands) present information about the Company’s financial assets that have been measured at fair value as of March 31, 2022 and December 31, 2021, and indicate the fair value of the hierarchy of the valuation inputs utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair value determined by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.


	As of March 31, 2022
	Total		Level 1		Level 2		Level 3
US Treasury-backed money market funds	$	116,280	$	116,280	$	—	$	—
Total	$	116,280	$	116,280	$	—	$	—


	As of December 31, 2021
	Total		Level 1		Level 2		Level 3
US Treasury-backed money market funds	$	30,719	$	30,719	$	—	$	—
Total	$	30,719	$	30,719	$	—	$	—

Money market funds are highly liquid investments that are valued based on quoted market prices in active markets, which represent a Level 1 measurement within the fair value hierarchy.

Preferred stock warrant liability

In connection with the November 24, 2020 Stock Purchase Agreement (Note 8), the Company granted warrants to purchase up to 35,529 shares of Series A-2 convertible preferred stock at a price per share equal to $11.42 and with a term ending upon the earlier of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, the consummation of a Deemed Liquidation Event, as such term is defined in the Company’s Restated Certificate of Incorporation or 10 years. As the warrants are for preferred stock, which do not qualify for equity classification, the warrants have been recorded as a liability and are required to be remeasured to fair value at each reporting date.

As there are a number of inputs that are not observable in the market, the warrant valuation represents a Level 3 measurement within the fair value hierarchy. The Company’s valuation of the preferred stock warrant utilized the Black-Scholes option-pricing model, which incorporates assumptions and estimates to value the preferred stock warrant.

The quantitative elements associated with the Company’s Level 3 inputs impacting the fair value measurement of the preferred stock warrant liability include the fair value per share of the underlying Series A-2 convertible preferred stock, the remaining contractual term of the warrant, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying preferred stock. The most significant assumption in the Black-Scholes option-pricing model impacting the fair value of the preferred stock warrant is the fair value of the Company’s Series A-2 convertible preferred stock as of each remeasurement date. The Company determines the fair value per share of the underlying preferred stock by taking into consideration its most recent sales of its convertible preferred stock. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrant. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrant. The Company has estimated a 0% dividend yield based on the expected dividend yield and the fact that the Company has never paid or declared dividends.

The Company recognizes changes in the fair value of the warrant liability as a component of other income (expense) in its condensed consolidated statements of operations and comprehensive loss. The Company will continue to recognize changes in the fair value of the warrant liability until the warrant is exercised, expires, or qualifies for equity classification.

A reconciliation of the Level 3 warrant liability is as follows (in thousands):


	Series A-2 Preferred Stock Warrant Liability
Balance as of December 31, 2020	$	30
Change in fair value		196
Balance as of December 31, 2021		226
Change in fair value		(58	)
Balance as of March 31, 2022	$	168

4. Property and Equipment, Net

The cost and accumulated depreciation of property and equipment were as follows (in thousands):


	March 31, 2022			December 31, 2021
Lab equipment	$	2,063		$	975
Computer and office equipment	$	42		$	91
Construction in process	935				—
Total property and equipment		3,040			1,066
Less: accumulated depreciation		(471	)		(430	)
Total property and equipment, net	$	2,569		$	636

Depreciation expense was $0.1 million and $0.05 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

5. Accrued Expenses

Accrued expenses consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Research and development expenses	$	7,718	$	5,343
Employee-related expenses	635			1,205
Taxes payable		4,326		—
Other		1,555		533
Total accrued expenses	$	14,234	$	7,081

6. Related Party Transactions

Technology license agreement

In March 2018, the Company, Oxford University Innovation Limited (OUI), and the Medical Research Council of United Kingdom Research and Innovation, or MRC (or collectively the Licensors), entered into a license of technology agreement, or the License Agreement, which was subsequently amended in December 2018 and further amended and restated in November 2020. The Licensors and affiliates hold shares of the Company's common stock. The License Agreement provides the Company with an exclusive world-wide license to licensed data and technology owned by OUI and MRC in respect of cell penetrating peptides for treatment of Duchenne muscular dystrophy, spinal muscular atrophy, and other conditions. The License Agreement provides the Company with the rights to grant and authorize sublicenses to make, use, sell, and import products and otherwise exploit the patent rights.

As consideration for the license, the Company made an initial upfront payment in 2018 of $0.1 million upon transfer of the license technology and data and in 2020 upon amending and restating the License Agreement made two additional payments of $19,000 for a Restatement Completion Fee and License Data Fee. The Company determined that the upfront payment and subsequent Restatement Completion Fee and License Data Fee as part of the license agreement would be expensed upon execution of the original contract and subsequent amendment as the license was acquired for research and development purposes which does not have alternative future uses, and the underlying technology has not reached technological feasibility.

The Company could be required to make milestone payments to the Licensors upon completion of certain patent and commercial milestones related to the patents and commercialization of certain of the Company’s product candidates. The aggregate potential milestone payments are $0.1 million. The Company also agreed to pay the Licensors low single digit royalties on net sales of any licensed products that are commercialized by the Company or sublicensees in excess of a threshold amount between £20<