Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2022

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") and include the accounts of the Company and its wholly owned subsidiaries, after elimination of all intercompany accounts and transactions. Any reference in these notes to applicable guidance is meant to refer to authoritative United States generally accepted accounting principles as found in the Accounting Standards Codification (“ASC”) and as amended by Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Amounts reported are based in thousands, except percentages, per share amounts or as otherwise noted. As a result, certain totals may not sum due to rounding.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual for research and development expenses, the research and development tax credit receivable, share-based compensation, collaboration agreement milestones, variable consideration in revenue recognition, operating lease assets and liabilities, and income taxes. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

Concentration of credit risk and of significant suppliers

The Company has no significant off-balance sheet risk, such as foreign currency contracts, options contracts, or other foreign hedging arrangements. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, marketable securities, and receivables.

The Company invests its excess cash, in line with its investment policy, in money market funds and high credit quality debt instruments. The Company's cash is deposited in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships or entities for which it has a receivable.

The Company is dependent upon a third-party contract manufacturer to develop, manufacture, and supply certain raw materials and conduct manufacturing activities for certain research and development and commercial programs. The disruption of the supply of raw materials and manufacturing activities could adversely affect the Company's operations. The

Company believes that its relationship with this manufacturer is satisfactory and has contingency plans in place to mitigate any adverse effects around the loss of this contract manufacturer.

Foreign currency

The financial statements of the Company’s subsidiaries with functional currencies other than the U.S. Dollar are translated into U.S. Dollars using period-end exchange rates for assets and liabilities, historical exchange rates for shareholders’ equity and weighted average exchange rates for operating results. Unrealized losses are driven primarily by intercompany balances denominated in currencies other than the functional currency of the entity with the intercompany balance, and typically fluctuates concurrently with fluctuations in the U.S. Dollar, Pounds sterling, and Euro exchange rates. Translation gains and losses are included in accumulated other comprehensive income (loss) in shareholders’ equity. Foreign currency transaction gains and losses are included in other income (expense), net in the results of operations. The Company recorded realized and unrealized foreign currency transaction losses of $24.3 million and of $1.2 million for the years ended December 31, 2022 and 2021, respectively, which is included in other income (expense) in the statements of operations and comprehensive loss.

Segment information

The Company operates in a single segment focusing on researching, developing and commercializing potentially curative gene therapies. Consistent with its operational structure, its chief operating decision maker manages and allocates resources at a global, consolidated level. Therefore, the results of the Company's operations are reported on a consolidated basis for the purposes of segment reporting.

All material long-lived assets of the Company reside in the United States or United Kingdom. The Company had property and equipment, net, of $7.5 million and $0.6 million located in the United Kingdom and United States, respectively, as of December 31, 2022. The Company had property and equipment, net, of $3.6 million and $1.2 million located in the United Kingdom and United States, respectively, as of December 31, 2021. The Company had right-of-use assets in the United States and United Kingdom of $11.2 million and $11.6 million, respectively, as of December 31, 2022. The Company had right-of-use assets in the United States and United Kingdom and European Union of $12.5 million and $11.8 million, respectively, as of December 31, 2021.

Cash equivalents

The Company considers all highly liquid investments purchased with original maturities of 90 days or less at the date of acquisition to be cash equivalents.

Marketable securities

Marketable securities consist of investments with original maturities greater than ninety days from the date of acquisition. The Company has classified its investments with maturities beyond one year as short term, based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. The Company considers its investment portfolio of investments as available-for-sale. Accordingly, these investments are recorded at fair value, which is based on quoted market prices or other observable inputs. Unrealized gains and losses are recorded as a component of other comprehensive income (loss). Realized gains and losses are determined on a specific identification basis and are included in other income (loss). Amortization and accretion of discounts and premiums is also recorded in other income (loss).

When the fair value is below the amortized cost of the asset an estimate of expected credit losses is made, the estimate is limited to the amount by which fair value is less than amortized cost. The credit-related impairment amount is recognized in the consolidated statements of operations and the remaining impairment amount and unrealized gains are reported as a component of accumulated other comprehensive income (loss) in shareholders’ equity. Credit losses are recognized through the use of an allowance for credit losses account and subsequent improvements in expected credit losses are recognized as a reversal of the allowance account. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis the allowance for credit loss is written off and the excess of the amortized cost basis of the asset over its fair value is recorded in the consolidated statements of operations.

Accounts receivable

Accounts receivable arise from product revenue and amounts due from the Company's collaboration partners and have payment terms that generally require payment within 30 to 90 days. For some Libmeldy customers, our payment terms can range from 30 days to under one year. The amount from product revenue represents amounts due from distributors in Europe, which are recorded net of reserves for trade discounts and allowances, and other incentives to the extent such amounts are payable to the customer by the Company. The Company monitors economic conditions to identify facts or circumstances that

may indicate that its receivables are at risk of collection. The Company provides reserves against accounts receivable for estimated losses, if any, that may result from a customer's inability to pay based on the composition of its accounts receivable, current economic conditions, and historical credit loss activity. Amounts determined to be uncollectible are charged or written-off against the reserve. The Company did not record any expected credit losses related to outstanding accounts receivable in 2022 and 2021.

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly, such as quoted market prices, interest rates, and yield curves.

Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.

To the extent a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair values requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company believes that the carrying amount reflected on the consolidated balance sheets for research and development tax incentive receivable, trade receivables, accounts payable, and accrued expenses approximate fair value due to their short-term maturities. The carrying value of the Company’s outstanding notes payable approximates fair value (a Level 2 fair value measurement), reflecting interest rates currently available to the Company

Restricted cash and construction deposits

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash on the Company's consolidated balance sheets. The Company has an outstanding letter of credit for $3.0 million associated with a lease and is required to hold this amount in a standalone bank account as of December 31, 2022 and 2021. The Company is also contractually required to maintain a cash collateral account associated with corporate credit cards and other leases in the amount of $1.3 million as of December 31, 2022 and 2021.

The Company includes the restricted cash balance in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported in the consolidated balance sheet that sum to the total of the amounts reported in the consolidated statement of cash flows (in thousands):


	As of December 31,
	2022		2021
Cash and cash equivalents	$	68,424	$	55,912
Restricted cash		4,215		4,266
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	72,639	$	60,178

Inventory

The Company began capitalizing inventory manufactured or purchased after the acquisition of Strimvelis in April 2018 and EMA approval of Libmeldy in December 2020. Inventory is stated at the lower of cost or estimated net realizable value with cost determined on a first-in, first-out basis. Inventory costs include raw materials, third-party contract manufacturing, third-party packaging services, and freight. Raw and intermediate materials that may be utilized for either research and development or commercial purposes are classified as inventory. Amounts in inventory that are used for research and development purposes are charged to research and development expense when the product enters the research and development process and can no longer be used for commercial purposes and, therefore, does not have an “alternative future use” as defined in authoritative guidance. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period and, if needed, writes down any excess and obsolete inventory to its estimated net realizable

value in the period it is identified. If they occur, such impairment charges are recorded as a component of cost of goods sold in the consolidated statements of operations and comprehensive income (loss). Inventory is included in prepaid expenses and other current assets on the consolidated balance sheets as its balance was not significant as of December 31, 2022 or 2021 (refer to Footnote 4).

Prior to the initial date that regulatory approval is received, costs related to the production of inventory are recorded as research and development expense on the Company’s consolidated statements of operations and comprehensive income (loss) in the period incurred.

Intangible assets, net

Intangible assets consist of milestones associated with the Company’s approved products net of accumulated amortization. The Company amortizes its intangible assets using the straight-line method over their estimated economic lives and periodically reviews for impairment. The Company has not recognized any impairment charges related to intangible assets to date.

Property and equipment

Property and equipment are recorded at cost and depreciated or amortized using the straight-line method over the following estimated useful lives.


Asset Type:		Estimated useful life
Lab equipment		5-10 years
Leasehold improvements		Shorter of lease term or estimated useful life
Furniture and fixtures		4 years
Office and computer equipment		3-5 years

Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property and equipment, are expensed as incurred. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in the consolidated statements of operations and other comprehensive loss.

Impairment of long-lived assets

Long-lived assets consist of property and equipment and operating lease right-of-use assets. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets or asset group may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant under performance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset or asset group to its carrying value. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of

an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value.

Research and development costs

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities including salaries and benefits, share-based compensation, facilities costs, depreciation, third-party license fees, certain milestone payments, external costs incurred by outside vendors engaged to conduct clinical development activities and clinical trials, the purchase of in-process research and development assets, and costs incurred to develop a manufacturing process, perform analytical testing and manufacture clinical trial materials. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered, the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered. In addition, funding from research grants is recognized as an offset to research and development expenses on the basis of costs incurred on the research program. Royalties to third parties associated with our research grants will be accrued when they become probable.

Accrued external research and development expenses

The Company has entered into various research and development contracts. These agreements are cancelable, and related costs are recorded as research and development expenses as incurred. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations to those third parties. Any accrual estimates are based on a number of factors, including the Company’s knowledge of the progress towards completion of the research and development activities, invoicing to date under the contracts, communication from the research institution or other entities of any actual costs incurred during the period that have not yet been invoiced, and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the Company have not been materially different from the actual costs.

Share-based compensation

The Company measures all stock options and other stock-based awards granted based on the fair value of the award on the date of the grant and recognizes stock-based compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The Company has elected to recognize forfeitures as they occur. Therefore, the reversal of compensation cost previously recognized for an award that is forfeited because of a failure to satisfy a service or performance condition is recognized in the period of the forfeiture. The Company classifies stock-based compensation expense in its consolidated statements of operations and comprehensive loss in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, which requires inputs based on certain subjective assumptions, including the fair value of the Company’s common stock, expected stock price volatility, the expected term of the stock option, the risk-free interest rate for a period that approximates the expected term of the stock option, and the Company’s expected dividend yield. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected term of the Company’s options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to the Company, including those in the early stages of product development with a similar and therapeutic focus. For these analyses, the Company selects companies with comparable characteristics to its own including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected term of the options/ The closing sale price per share of the Company’s common stock as reported on The Nasdaq Global Market on the date of grant is used to determine the fair value, which is then used to establish the exercise price per share of share-based awards to purchase common stock.

Comprehensive loss

Comprehensive loss is composed of net loss and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on marketable securities and foreign currency translation gains and losses.

Leases

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on specific facts and circumstances, the existence of an identified asset(s), if any, and the Company’s control over the use of the identified asset(s), if applicable. Operating lease assets represent a right to use an underlying asset for the lease term and operating lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease liabilities with a term greater than one year and their corresponding right-of-use assets are recognized on the balance sheet at the commencement date of the lease based on the present value of lease payments over the expected lease term. The Company recognizes a corresponding right-of-use (“ROU”) asset, initially measured as the amount of lease liability, adjusted for any initial lease costs or lease payments made before or at the commencement of the lease, and reduced by any lease incentives. The Company made an accounting policy election to not record a right-of-use asset or lease liability for leases with a term of one year or less. To date, the Company has not identified any material short-term leases, either individually or in the aggregate.

The lease liability is measured at the present value of future lease payments, discounted using the discount rate as of the lease commencement date. Future lease payments may include payments that depend on an index or a rate (such as the consumer price index or other market index). The Company initially measures payments based on an index or rate by using the applicable rate at lease commencement and subsequent changes in such rates are recognized as variable lease costs. Variable payments that do not depend on a rate or index are not included in the lease liability and are recognized as they are incurred. The Company’s contracts typically do not have variable payments based on index or rate.

When readily determinable, the discount rate used to calculate the lease liability is the rate implicit in the lease. As the Company’s leases do not typically provide an implicit rate, the Company utilizes an incremental borrowing rate, which is the rate incurred to borrow an amount on a collateralized basis over a similar term as the associated lease in a similar economic environment. The Company estimated the incremental borrowing rate based on the Company’s currently outstanding credit facility as inputs to the analysis to calculate a spread, adjusted for factors that reflect the profile of secured borrowing over the expected term of the lease. The lease term used to calculate the lease liability includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. With limited exceptions, the nature of the Company's facility leases is such that there are no economic or other conditions that would indicate that it is reasonably certain at lease commencement that the Company will exercise options to extend the term.

The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, utilities, performance of manufacturing services, purchase of inventory, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components. Although separation of lease and non-lease components is required, certain accounting policy elections are available to entities. Entities can elect accounting policies that would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company has elected not to apply the accounting policy with respect to its lease of manufacturing space at a contract manufacturing organization, and as a result, the Company has allocated the consideration between the lease and non-lease components of the contract based on the respective fair values of the lease and non-lease components. The Company calculated the fair value of the lease and non-lease components using financial information readily available as part of its master services arrangement and other representative data indicative of fair value.

The Company’s leases consist of only operating leases. Operating leases are recognized on the balance sheet as ROU assets, operating lease liabilities, and operating lease liabilities non-current. Fixed payments are included in the calculation of the lease balances while certain variable costs paid for certain operating and pass-through costs are excluded. Lease expense is recognized over the expected lease term on a straight-line basis.

The Company accounts for sublease income on a straight-line basis over the respective lease period and records an unbilled rent receivable for sublease income incurred but not yet paid. The Company periodically performs a collectability assessment associated with any unbilled rent receivables. The Company recognizes the sublease income as a reduction to the related operating expense associated with the head lease.

Strimvelis loss provision

As part of the GSK transaction, the Company is required to maintain commercial availability of Strimvelis in the European Union until such time that an alternative gene therapy is available. Strimvelis is not currently expected to generate sufficient cash flows to overcome the costs of maintaining the product and certain regulatory commitments; therefore, the Company initially recorded a liability associated with the loss contract of $18.4 million in 2018. The Company recognizes the amortization of the loss provision on a diminishing balance basis based on the actual net loss incurred associated with the Strimvelis program and the expected future net losses to be generated until such time as Strimvelis is no longer commercially available. The amortization of the provision is recorded as a reduction to research and development expense. The Company

has made an estimate of the expected future losses associated with Strimvelis and will adjust this estimate as facts and circumstances change regarding the commercial availability and costs of maintaining and selling Strimvelis. The Company does not update the accrued loss provision for any subsequent adjustment of future losses, however, the timing of recognizing the amortization of what was originally recorded is adjusted for updated future losses.

The following table below outlines the changes to the Strimvelis loss provision for the periods ended December 31, 2022 and 2021 (in thousands):


	Year Ended December 31,
	2022			2021
Balance at beginning of period	$	3,419		$	4,482
Amortization of loss provision		(274	)		(1,037	)
Foreign currency translation		(326	)		(26	)
Balance at end of period	$	2,819		$	3,419

As of December 31, 2022, the entire balance of the Strimvelis loss provision was categorized as current. As of December 31, 2021, $0.7 million of the loss provision was classified as current, and $2.7 million was classified as non-current.

United Kingdom Research and development income tax credits

As the Company carries out research and development activities, it is able to submit tax credit claims from two UK research and development tax relief programs: the Small and Medium-Sized Enterprises research and development tax credit (“SME”) program and the Research and Development Expenditure Credit (“RDEC”), depending on eligibility. Qualifying expenditures largely comprise employment costs for research staff, consumables, and certain internal overhead costs incurred as part of research projects for which the Company does not receive income.

The RDEC and SME credits are not dependent on the Company generating future taxable income or on the ongoing tax status or tax position of the Company. Each reporting period, the Company assesses its research and development activities and expenditures to determine whether the nature of these costs will qualify for credit under the tax relief programs and whether the claims will ultimately be realized based on the allowable reimbursable expense criteria established by the UK government. The Company expects a proportion of expenditures incurred in relation to its pipeline research, clinical trials management, and manufacturing development activities to be eligible for the research and development tax relief programs for the year ended December 31, 2022. The Company has qualified under the more favorable SME regime for the year ended December 31, 2021 and expects to qualify under the SME regime for the year ending December 31, 2022.

The Company recognizes credits from the research and development incentives when the relevant expenditure has been incurred and there is reasonable assurance that the reimbursement will be received. Such credits are accounted for as reductions in research and development expenses. The following table outlines the changes to the research and development tax credit receivable, including amount recognized as an offset to research and development expense during the years ended December 31, 2022 and 2021 (in thousands):


	Year Ended December 31,
	2022			2021
Balance at beginning of period	$	30,723		$	17,344
Recognition of credit claims as offset to research and development expense		8,243			13,920
Receipt of credit claims		(30,811	)		-
Foreign currency translation		(2,213	)		(541	)
Balance at end of period	$	5,942		$	30,723

As of December 31, 2022 and 2021, the Company’s tax credit receivable was classified as current with receipt of the credit expected within twelve months of the balance sheet date.

Income taxes

The Company is primarily subject to corporation taxes in the United Kingdom, the United States, and certain European Union countries in which it has legal subsidiaries. The calculation of the Company’s tax provision involves the application of country applicable tax law and requires judgment and estimates.

The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes, which provides for deferred taxes using an asset and liability approach. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. The Company determines its deferred tax assets and liabilities based on differences between financial reporting and tax bases of assets and

liabilities, which are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized.

The Company accounts for uncertainty in income taxes by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not-to be sustained, the tax position is then assessed as the amount of benefit to recognize in the consolidated financial statements. The amount of benefits that may be used is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.

Product revenue, net

Libmeldy

In January 2022, the Company began generating product revenue from sales of Libmeldy in Europe following the approval of Libmeldy by the European Commission in December 2020 for the treatment of early onset MLD, characterized by biallelic mutations in the ARSA gene leading to a reduction of the ARSA enzymatic activity in children with (i) late infantile or early juvenile forms, without clinical manifestations of the disease, or (ii) the early juvenile form, with early clinical manifestations of the disease, who still have the ability to walk independently and before the onset of cognitive decline.

The Company recognizes revenue when control of promised goods is transferred to a customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Control of the product transfers upon infusion of the product.

To determine revenue recognition, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price, including variable consideration, if any; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies the performance obligations. The Company only applies the five-step model to contracts when collectability of the consideration to which it is entitled in exchange for the goods the Company transfers to the customer is determined to be probable.

In certain regions of Europe and the Middle East, the Company utilizes distributors to act in an agent capacity including for patient identification and other related functions. The Company is exclusively responsible for product fulfillment and retains inventory risk and pricing discretion of the product. Evaluation of these key indicators supports the assertion that the Company maintains control over the product prior to delivery to the patient. The Company has concluded that it is the principal in these transactions and records the associated revenue on a gross basis with any payments to these entities being recorded as a selling expense.

Amounts are recorded as accounts receivable when the right to the consideration is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that would have been recognized is one year or less or the amount is immaterial. As of December 31, 2022, the Company has not capitalized any costs to obtain contracts.

The Company recognizes product revenue, net of variable consideration related to certain allowances and accruals, when the customer takes control of the product, which is at a point in time once the patient has been infused. Product revenue is recorded at the net sales price, or transaction price. The Company records estimated product revenue reserves, which are classified as a reduction in product revenue, to account for the components of variable consideration. Variable consideration includes the following components: government rebates, including performance-based rebates, trade discounts and allowances, and other incentives, which are described below.

These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as a liability. The Company's estimates of reserves established for variable consideration are calculated based upon an application of the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts. These estimates reflect the Company's historical experience, current contractual and statutory requirements, specific known market events and trends, industry data, and current expectations around final pricing. The amount of variable consideration that is included in the transaction price may be subject to constraint and is included in net product revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The actual amounts of consideration received may ultimately differ from the Company's estimates. If actual results vary, the Company adjusts these estimates, which could have an effect on earnings in the period of adjustment. The following is a summary of the types of variable consideration the Company records:

Government rebates: The Company is subject to statutory government rebates on sales in certain European countries as well as estimated rebates in certain European countries because final pricing has not yet been negotiated. The Company records reserves for rebates in the same period the related product revenue is recognized, resulting in a reduction of product revenue and a current liability that is included in accrued expenses on the Company’s consolidated balance sheet. The Company is also subject to potential rebates in connection with performance criteria agreed upon with certain payors. The estimate for rebates is based on statutory discount rates, industry pricing data, current expectations around final pricing to be obtained, and historical experience of the performance of the Company’s products during clinical trials. The Company classifies rebates within accrued expenses in the accompanying consolidated balance sheets.

Trade discounts and allowances: The Company may offer customers discounts, such as prompt pay discounts to remit payment in accordance with the stated terms of the invoice. These discounts are explicitly stated in the contracts and recorded in the period the related product revenue is recognized. The Company estimates which customers will earn these discounts and fees and deducts these discounts and fees in full from gross product revenue and accounts receivable at the time the Company recognizes the related revenue. The Company classifies trade discounts and allowances as a reduction of accounts receivable within the accompanying consolidated balance sheets.

Product returns: Based on the timing of revenue recognition upon treatment with the patient, the Company does not expect any returns of the Company’s products.

Other incentives: While the Company does not currently have any other incentives that have been recorded to date, the Company may enter into future arrangements that have other incentives that will be recorded as a reduction of revenue.

Strimvelis

The Company’s product sales of Strimvelis are currently distributed exclusively at the San Raffaele Hospital in Milan, Italy. The hospital will purchase and pay for the products and submit a claim to the payer. The Company’s contracted sales with the hospital contains a single performance obligation and the Company recognizes revenue from product sales when the Company has satisfied its performance obligation, which is upon transferring control of the products to the hospital. The Company evaluated the variable consideration under ASC 606 and there is currently no variable consideration included in the transaction price for the products. Costs to manufacture and deliver the product and those associated with administering the therapy are included in the cost of product sales. As the product is sold in direct relation to a scheduled treatment, the Company estimates there is limited risk of product return, including the risk of product expiration.

Collaboration revenue

The terms of the Company’s collaboration agreements may include consideration such as non-refundable license fees, funding of research and development services, payments due upon the achievement of clinical and pre-clinical performance-based development milestones, regulatory milestones, manufacturing services, sales-based milestones and royalties on product sales.

The Company first evaluates collaboration arrangements to determine whether the arrangement (or part of the arrangement) represents a collaborative arrangement pursuant to ASC Topic 808, Collaborative Arrangements, based on the risks and rewards and activities of the parties pursuant to the contractual arrangement. The Company accounts for any collaborative arrangement or elements within the contract that are deemed to be a collaborative arrangement, and not a customer relationship, in accordance with ASC 808. Through December 31, 2022, the Company entered into one agreement with Pharming Group N.V. (the “Pharming Agreement”, see Note 16) that is accounted for pursuant to ASC 606 five-step model.

The Company recognizes the transaction price allocated to upfront license payments as revenue upon delivery of the license to the customer and resulting ability of the customer to use and benefit from the license, if the license is determined to be distinct from the other performance obligations identified in the contract. If the license is considered to not be distinct from other performance obligations, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied (i) at a point in time, but only for licenses determined to be distinct from other performance obligations in the contract, or (ii) over time, and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from license payments. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

The Pharming Agreement entitles the Company to additional payments upon the achievement of performance-based milestones. These milestones are generally categorized into three types: development milestones, regulatory milestones, and sales-based milestones. The Company is also eligible to receive from Pharming tiered royalty payments on worldwide net sales. The Company evaluates whether it is probable that the consideration associated with each milestone will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the

transaction price using the most likely amount method, whereas amounts that do not meet this threshold are considered constrained and excluded from the transaction price until they meet this threshold. Milestones tied to regulatory approval, and therefore not within the Company’s control, are considered constrained until such approval is received. Upfront and ongoing development milestones per the collaboration agreements are not subject to refund if the development activities are not successful. At the end of each subsequent reporting period, the Company re-evaluates the probability of a significant reversal of the cumulative revenue recognized for the milestones, and, if necessary, adjusts the estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues from collaborators in the period of adjustment.

The Company may enter into an agreement that includes sales-based milestone payments and royalties in exchange for a license of intellectual property. The Company considers the underlying facts and circumstances of these agreements, noting whether the future payments are contingent upon future sales and whether they are dependent on a third party’s ability to successfully commercialize a product using the licensed intellectual property. The Company also considers whether the license is the only, or predominant, item to which the milestone payments and royalties relate. If the Company concludes the license is the predominant item in the agreement, therefore the primary driver of value, the Company excludes sales-based milestone payments and royalties from the transaction price until the sale occurs (or, if later, until the underlying performance obligation to which some or all of the royalty has been allocated has been satisfied or partially satisfied). Currently, the Company has not recognized any royalty revenue resulting from the Pharming Agreement.

ASC 606 requires the Company to allocate the arrangement consideration on a relative standalone selling price basis for each performance obligation after determining the transaction price of the contract and identifying the performance obligations to which that amount should be allocated. The relative standalone selling price is defined in ASC 606 as the price at which an entity would sell a promised good or service separately to a customer. If other observable transactions in which the Company has sold the same performance obligation separately are not available, the Company is required to estimate the standalone selling price of each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Whenever the Company determines that a contract should be accounted for as a combined performance obligation, which is recognized over time, it will utilize the cost-to-cost input method. Revenue will be recognized over time using the cost-to-cost input method, based on the total estimated costs to fulfill the obligations. The Company will recognize revenue as services are delivered. Significant management judgment is required in determining the estimate of total costs required under an arrangement and the period over which the Company is expected to complete its performance obligations under an arrangement.

Consideration that does not meet the requirements to satisfy the above revenue recognition criteria is a contract liability and is recorded as deferred revenue in the consolidated balance sheets. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that the Company expects will not be recognized within the next 12 months are classified as long-term deferred revenue.

The Company recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) each performance obligation is satisfied, either at a point in time or over time. In particular, for the Company’s collaborations with Pharming, revenue attributable to research services is recognized as those services are provided, based on the costs incurred to date.

Net loss per share

Basic net loss per share is computed by dividing the net loss by the weighted average number of ordinary shares outstanding for the period. Diluted net loss is computed by adjusting net loss based on the potential impact of dilutive securities. Diluted net loss per share is computed by dividing the diluted net loss by the weighted average number of ordinary shares outstanding for the period, including potentially dilutive ordinary shares. For the purpose of this calculation, outstanding options and unvested restricted shares are considered potential dilutive ordinary shares. Since the Company was in a loss position for all periods presented, the basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all potential ordinary share equivalents outstanding would have been anti-dilutive.

The following securities, presented based on amounts outstanding at each period end, are considered to be ordinary share equivalents, but were not included in the computation of diluted net loss per ordinary share because to do so would have been anti-dilutive:


	As of December 31,
	2022		2021
Share options		13,076,959		14,042,781
Unvested restricted incentive shares		2,253,199		512,908
		15,330,158		14,555,689

Recent accounting pronouncements

In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, which requires increased transparency in the disclosures about government assistance in the notes to the financial statements. This ASU is effective for the Company beginning January 1, 2022, and interim periods within that year, with early adoption permitted. The Company adopted and applied the amendments of this ASU to its disclosures. The application of this ASU did not have a material impact on the Company's financial position, results of operations or cash flows.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and issued two subsequent amendments: ASU 2021-01, issued in January 2021, refines the scope of ASU and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate reform activities and ASU 2022-06, issued in December 2022, which extends the effective period of the ASU through December 31, 2023 (collectively, including ASU 2020-04, “ASC 848”). ASC 848 provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. ASC 848 is effective for all entities as of March 12, 2020, through December 31, 2023, at which time transition is expected to be complete. The Company is currently reviewing the provisions of this pronouncement, specifically its impact on its notes payable, but does not expect this guidance will have a material impact on the Company's consolidated financial statements.