You should read the following discussion and analysis of our financial condition
and results of operations together with the "Selected Financial Data" section of
this Quarterly Report on Form 10-Q (this "Quarterly Report") and our financial
statements and the related notes appearing elsewhere in this Quarterly Report.
This discussion and other parts of this Quarterly Report 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. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the "Risk Factors" section of this
Quarterly Report.

Overview

We are a late-clinical stage, cell therapy company developing an innovative
method of allogeneic hematopoietic stem cell transplantation ("allo-HSCT") that
we believe has the potential to transform the standard of care in solid organ
transplantation, certain severe autoimmune diseases and certain severe blood,
immune and metabolic disorders. In the organ transplant setting, which is our
initial focus, we believe our proprietary therapeutic approach, which we call
Facilitated Allo-HSCT Therapy, could prevent organ rejection without the
morbidity and mortality that has been associated with the use of lifelong
anti-rejection medicines, also known as chronic immunosuppression. Beyond the
organ transplant setting, our Facilitated Allo-HSCT Therapy also has the
potential to treat a range of severe autoimmune diseases and severe blood,
immune and metabolic disorders, in each case with potential for similar outcomes
to what has previously been observed with HSCT, while mitigating the toxicities,
morbidities and extended hospital stay associated with the conditioning regimen
typically required by HSCT. We believe that our target indications, individually
and collectively, represent a significant unmet need and commercial opportunity.

We were incorporated as Regenerex, Inc. in 2018 under the laws of the State of
Delaware, having converted from a limited liability company under the name
Regenerex LLC. In 2019, we changed our corporate name from Regenerex, Inc. to
Talaris Therapeutics, Inc.

Since our inception, we have devoted substantially all of our resources to
developing our lead product candidate, FCR001, building our intellectual
property portfolio, business planning, raising capital and providing general and
administrative support for these operations. To date, we have principally
financed our operations through private placements of convertible preferred
stock, payments under a former research collaboration with Novartis, Inc.,
research grants and most recently, an initial public offering ("IPO"). Through
September 30, 2022, we had received net proceeds of $186.2 million from sales of
our convertible preferred stock and net proceeds of $137.2 million, after
deducting underwriting discounts and commissions and other expenses, from our
IPO.

We have incurred significant operating losses since inception. Our ability to
generate product revenue sufficient to achieve profitability will depend heavily
on the successful development and eventual commercialization of our product and
any future product candidates. Our net loss was $55.4 million for the nine
months ended September 30, 2022 and $47.8 million for year ended December 31,
2021. As of September 30, 2022, we had an accumulated deficit of $146.2 million.
We expect to continue to incur net losses for the foreseeable future, and we
expect our research and development expenses, general and administrative
expenses and capital expenditures to continue to increase. In particular, we
expect our expenses to increase as we continue our development of, and seek
regulatory approvals for, our product candidates, as well as hire additional
personnel, pay fees to outside consultants, lawyers and accountants, and incur
other increased costs associated with being a public company. In addition, if we
obtain marketing approval for any product candidates, we expect to incur
significant commercialization expenses related to product manufacturing,
marketing, sales and distribution. We may also incur expenses in connection with
the in-licensing or acquisition of additional product candidates. Furthermore,
we expect to incur additional costs associated with operating as a public
company, including significant legal, accounting, investor relations, compliance
and other expenses that we did not incur as a private company. As a result, we
will need substantial additional funding to support our continuing operations
and pursue our growth strategy. Until such time as we can generate significant
revenue from product sales, if ever, we expect to finance our operations through
the sale of equity, debt financings, or other capital sources, which may include
collaborations with other companies or other strategic transactions. We may be
unable to raise additional funds or enter into such other agreements or
arrangements when needed on favorable terms, or at all. If we fail to raise
capital or enter into such agreements as and when needed, we may have to
significantly delay, reduce or eliminate the development and commercialization
of one or more of our product candidates or delay our pursuit of potential
in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product
development, we are unable to predict the timing or amount of increased expenses
or when or if we will be able to achieve or maintain profitability. Even if we
are able to generate product sales, we may not become profitable. If we fail to
become profitable or are unable to sustain profitability on a continuing basis,
then we may be unable to continue our operations at planned levels and be forced
to reduce or terminate our operations.

Based upon our current operating plan, we believe that our existing cash and
cash equivalents and marketable securities of $193.9 million as of September 30,
2022 will be sufficient to fund our operating expenses and capital expenditure
requirements through 2024.

                                       18
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We have based this estimate on assumptions that may prove to be wrong, and we
could exhaust our available capital resources sooner than we expect. To finance
our operations beyond that point we will need to raise additional capital, which
cannot be assured.

Recent Developments

On October 20, 2022, we announced a clinical update on our ongoing FREEDOM-1
Phase 3 clinical trial in living donor kidney transplant ("LDKT") recipients. On
October 18, 2022, we received a report of a patient death, which triggered a
temporary stopping requirement and review by the Data Monitoring Committee
("DMC"). After their review of this case, the DMC determined that trial
enrollment and dosing may continue. We reported this event and the DMC's
recommendation to the U.S. Food and Drug Administration (the "FDA"). The
deceased patient was one of three study subjects reported in June 2022 to have
been diagnosed with grade II acute graft-vs-host disease ("aGvHD"). As reported,
this patient was also diagnosed with moderate chronic GvHD that was responding
to treatment at the time of the update. The patient was recently hospitalized
with grade IV GvHD that was complicated by serious infections leading to
respiratory and renal failure, and ultimately death.

In June 2022, we provided a clinical update on the trial and summarized an
amendment to the trial protocol following a review of all GvHD cases to date,
spanning the Phase 2 and Phase 3 trials. We reported that the incidence of GvHD
in FCR001 subjects was correlated with high CD34+ cell counts and high total
nucleated cell counts in the FCR001 product. We also noted a correlation between
the use of plerixafor as a donor mobilizing agent and an increased risk of GvHD,
as plerixafor significantly increased CD34+ and total nucleated cell counts in
the FCR001 product. We introduced two risk mitigation measures for GvHD in the
amended trial protocol: (1) elimination of plerixafor as a donor mobilizing
agent, and (2) addition of a second post-transplant dose of cyclophosphamide.
The deceased patient had a related, same sex donor with an HLA mismatch of 2/6.
Although plerixafor was not used to mobilize this donor, the starting FCR001
material contained a high number of CD34+ cells and total nucleated cells, both
of which we had identified during our review as factors that correlated with an
increased risk of GvHD. The patient had not received a second post-transplant
dose of cyclophosphamide as the patient was treated prior to the June 2022
protocol amendment. As of October 20, 2022, the other two patients who were
previously reported to have had grade II aGvHD had experienced complete
resolution of their aGvHD symptoms, although one patient experienced additional
flares that were also responsive to treatment. After reviewing the facts of this
case, the DMC concluded that the protocol modifications implemented in June 2022
should be sufficient to mitigate the risk of GvHD going forward, and recommended
continuation of the trial without further modifications.

Impact of COVID-19 on Our Business



The ongoing worldwide COVID-19 pandemic and recent emergence of variants of the
virus have affected and may affect in the future our ability to initiate and
complete preclinical studies, delay the initiation and completion of our current
and planned clinical trials, disrupt regulatory activities or have other adverse
effects on our business, results of operations, financial condition and
prospects. For example, screening and enrollment in our ongoing FREEDOM-1 Phase
3 clinical trial in the United States have been adversely impacted by the
ongoing COVID-19 pandemic. In addition, we and the third-party manufacturers,
contract research organizations ("CROs"), and academic collaborators that we
engage may face future disruptions that could affect our ability to initiate and
complete preclinical studies or clinical trials, including disruptions in
procuring items that are essential for our research and development activities,
such as, for example, raw materials used in the manufacture of our product
candidates and laboratory supplies for our preclinical studies and clinical
trials, in each case, for which there may be shortages because of ongoing
efforts to address the ongoing COVID-19 pandemic. We cannot be certain what the
overall impact of the ongoing COVID-19 pandemic will be on our business, and it
has the potential to adversely affect our business, financial condition, results
of operations and prospects.

In response to recommendations from state and local government authorities, we
have adopted a variety of workplace safety policies and procedures, including
vaccination and masking policies, designed to maintain the health and safety of
our workforce We plan to continue monitoring COVID-19 in the areas in which we
operate and may change our policies and procedures from time to time in response
to changing health conditions.

License Agreement



In October 2018, we entered an amended and restated exclusive license agreement
("ULRF License Agreement") with University of Louisville Research Foundation
("ULRF") related to certain licensed patent rights and know-how related to human
facilitating cells for our Facilitated Allo-HSCT Therapy approach. Pursuant to
the ULRF License Agreement, ULRF granted us an exclusive, worldwide license
under such patents and a nonexclusive royalty-bearing, worldwide license for
such know-how to research, develop, commercialize and manufacture FCR001 and
products containing FCR001 in all fields, without limitation. ULRF also granted
us the right to grant sublicenses in accordance with the ULRF License Agreement.
Under the terms of the agreement, we are obligated to compensate ULRF three
percent of net sales of all licensed products sold, one third of any non-royalty
sublicensing income, and up to $1.625 million in regulatory and sales milestones
on each licensed product upon the occurrence of specific events as outlined in
the

                                       19
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license agreement; and annual license maintenance fees. As of September 30, 2022, we have paid ULRF $0.1 million in milestone payments and $0.2 million in annual maintenance fees, for a total of $0.3 million.



In addition, upon execution of the ULRF License Agreement, we granted contingent
equity consideration equal to 65,186 shares of common stock to ULRF. Pursuant to
the ULRF License Agreement, on or prior to our first underwritten public
offering or any transaction that is treated as a deemed liquidation event, we
are required to either issue to ULRF the 65,186 shares in common stock or make a
cash payment equal to the 65,186 shares of common stock multiplied by either the
price per share of common stock in the underwritten public offering or by the
price per share of common stock received in connection with such deemed
liquidation event. Coincident with the completion of our IPO in May 2021, we
issued to ULRF 48,889 shares of common stock in addition to $0.3 million in a
cash payment to fully satisfy the contingent stock liability to ULRF (see Note 8
in the accompanying financial statements). As of September 30, 2022 and December
31, 2021, we had no liability to ULRF for contingent common stock.

Components of Our Results of Operations

Revenue



We have not generated any revenue since our inception and do not expect to
generate any revenue from the sale of products in the future, if at all. If our
product candidates we are currently developing and that we may develop in the
future are successful and result in marketing approval or if we enter into
collaboration or license agreements with third parties, we may generate revenue
in the future from a combination of product sales or payments from such
collaboration or license agreements.

Operating Expenses

Research and Development Expenses



Research and development expenses consist primarily of costs incurred in
connection with the development and research of our novel cell therapy, as well
as unrelated discovery program expenses. We expense research and development
costs as incurred. These expenses include:

employee-related expenses, including salaries, related benefits and stock-based compensation expense, for employees engaged in research and development functions;

external research and development expenses incurred under arrangements with third parties, such as CROs, investigational sites, and consultants;

the cost of acquiring, developing, and manufacturing clinical study materials;

costs associated with preclinical and clinical activities and regulatory operations;

costs incurred in development of intellectual property; and

an allocated portion of facilities and other infrastructure costs associated with our research and development activities.



The Company enters into consulting, research, and other agreements with
commercial entities, researchers, universities, and others for the provision of
goods and services. Such arrangements are generally cancelable upon reasonable
notice and payment of costs incurred. Costs are considered incurred based on an
evaluation of the progress to completion of specific tasks under each contract
using information and data provided by the respective vendors, including the
Company's clinical sites. These costs consist of direct and indirect costs
associated with specific projects, as well as fees paid to various entities that
perform certain research on behalf of the Company. Depending upon the timing of
payments to the service providers, the Company recognizes prepaid expenses or
accrued expenses related to these costs. These accrued or prepaid expenses are
based on management's estimates of the work performed under service agreements,
milestones achieved, and experience with similar contracts. The Company monitors
each of these factors and adjusts estimates accordingly.

The successful clinical development and subsequent commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties with product development and commercialization, including significant variations in our clinical development costs as well as the following factors:



•
per patient trial costs;

the number of trials required for approval;

the number of sites included in the trials;

the countries in which the trials are conducted;


                                       20
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the length of time required to enroll eligible patients;

the number of patients that participate in the trials;

the length of hospitalization of patients in our clinical trials

the drop-out or discontinuation rates of patients;

potential additional safety monitoring requested by regulatory agencies;

the duration of patient participation in the trials and follow-up;

the cost and timing of manufacturing our product candidates;

the phase of development of our product candidates;

the efficacy and safety profile of our product candidates. the timing and progress of nonclinical and clinical development activities;

the number and scope of preclinical and clinical programs we decide to pursue and our ability to successfully advance those programs without holds or delays;

raising necessary additional funds;

the progress of the development efforts of parties with whom we may enter into collaboration arrangements;

our ability to maintain our current development program and to establish new ones;

our ability to establish new licensing or collaboration arrangements;

the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the U.S. Food and Drug Administration ("FDA") or any comparable foreign regulatory authority;

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

the availability of drug substance and drug product for use in production of our product candidate;

the development of commercial scale manufacturing and distribution processes for our product candidates;

establishing and maintaining agreements with third-party manufacturers for commercial manufacturing, if we pursue a third party manufacturing strategy outside of the United States, and if our product candidate is approved;

our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;

our ability to protect our rights in our intellectual property portfolio;

the commercialization of our product candidate, if and when approved;

obtaining and maintaining third-party insurance coverage and adequate reimbursement;

the acceptance of our product candidate, if approved, by patients, the medical community and third-party payors;

competition with other products; and

a continued acceptable safety profile of our therapies following approval.



We may never succeed in obtaining regulatory approval for any of our current and
future product candidates, including FCR001. We may obtain unexpected or adverse
results from our preclinical studies and clinical trials including FREEDOM-1,
FREEDOM-2, and FREEDOM-3. We may elect or regulatory authorities may require us
to discontinue, delay or modify clinical trials of some product candidates or
focus on others. A change in the outcome of any of these factors could mean a
significant change in the costs and timing associated with the development of
our current and future preclinical and clinical product candidates. For example,
if the FDA or another regulatory authority were to require us to conduct
clinical trials for FCR001 beyond those that we currently anticipate will be
required for the completion of clinical development, or if we experience
significant delays in execution of any of our preclinical studies or execution
or enrollment in any of our clinical trials, we could be required to expend
significant additional financial resources and time on the completion of
preclinical and clinical development. A change in the outcome of any of these
variables with respect to the development of our product candidates could
significantly change the costs and timing associated with the development of
that product candidate. We may never succeed in obtaining regulatory approval
for any of our product candidates.

Research and development activities account for a significant portion of our
operating expenses. We expect our research and development expenses to increase
for the foreseeable future as we continue to implement our business strategy,
which includes

                                       21
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advancing FCR001 through clinical development of FREEDOM-1, FREEDOM-2 and FREEDOM-3 as well as other product candidates into clinical development, expanding our research and development efforts, including hiring additional personnel to support our research efforts, our clinical and product development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials.



We use our personnel and infrastructure resources across multiple research and
development programs directed toward identifying and developing product
candidates. Our direct research and development expenses are tracked on a
program-by-program basis and consist primarily of external costs, including fees
paid to consultants, contractors and CROs in connection with our development
activities and the cost of acquiring, developing, and manufacturing clinical
study materials. At this time, we do not fully allocate personnel costs to
individual programs as many of our personnel are deployed across multiple
programs.

General and Administrative Expenses



General and administrative expenses consist primarily of salaries and related
costs for personnel in executive, finance, corporate and business development,
and administrative functions. General and administrative expenses also include
legal fees relating to patent and corporate matters, professional fees for
accounting, auditing, tax and administrative consulting services, insurance
costs and other operating costs, including an allocated portion of facilities
and other infrastructure costs associated with our general and administrative
activities.

We anticipate that our general and administrative expenses will increase in the
future as we increase our headcount to support development of our product
candidates and our continued research activities. We also anticipate that we
will incur increased accounting, audit, legal, regulatory, compliance and
director and officer insurance costs as well as investor and public relations
expenses associated with being a public company.

Other Income (Expense), Net



Other income (expense), net is comprised of interest income earned on cash
reserves in our operating account and on our marketable securities, amortization
expense and accretion income on our marketable securities and expense incurred
in relation to the change in fair value of our contingent stock liability with
ULRF.

Results of Operations

Comparison of Three Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021:



                                                   Three months ended September 30,
                                                      2022                   2021             Change
                                                                        (in thousands)
Operating expenses
Research and development                        $         14,981       $          9,183     $    5,798
General and administrative                                 4,842                  3,874            968
Total operating expenses                                  19,823                 13,057          6,766
Loss from operations                                     (19,823 )              (13,057 )       (6,766 )
Interest and other income (expense), net                     812                    116            696
Net loss                                        $        (19,011 )     $        (12,941 )   $   (6,070 )




                                       22

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Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended September 30, 2022 and 2021:



                                                    Three months ended September 30,
                                                      2022                     2021             Change
                                                                          (in thousands)
Direct research and development program
expense:
FCR001 clinical and pre-clinical programs       $           4,294         $         2,431     $    1,863
Indirect research and development expenses:
Personnel related (including stock-based
compensation)                                               7,301                   4,893          2,408
Facilities and other operating costs                        3,386                   1,859          1,527
Total research and development expenses         $          14,981         $         9,183     $    5,798




Research and development activities are central to our business model. We expect
that our research and development expenses will continue to increase
substantially for the foreseeable future as we advance FCR001 through clinical
trials, including our FREEDOM-1 Phase 3 clinical trial, and we continue to
develop additional product candidates.

Research and development expenses were $15.0 million for the three months ended September 30, 2022, compared to $9.2 million for the three months ended September 30, 2021. The increase of $5.8 million was primarily due to:

An increase of $2.4 million in personnel costs related to (i) the need for additional staff to conduct our FREEDOM-1 Phase 3 clinical trial and our FREEDOM-2 and FREEDOM-3 Phase 2 clinical trials, (ii) advance pre-clinical activities, including those related to our deceased donor program, (iii) support medical affairs and patient recruitment activities, and (iv) increases in stock-based compensation expense related to additional stock option and RSU grants in 2022;


An increase of $1.9 million in direct FCR001 clinical program expenses related
to increased activity in our FREEDOM-1 Phase 3 trial resulting from treating
additional subjects and activating additional clinical sites and activating
additional clinical sites in our FREEDOM-2 and FREEDOM-3 Phase 2 clinical
trials; and


An increase of $1.5 million in other costs related to patient advocacy efforts,
medical communications development, consulting, research collaborations,
increased medical conference activity other services in support of ongoing and
planned clinical trials.

General and Administrative Expenses



The following table summarizes our general and administrative expenses to
support our business activities for the three months ended September 30, 2022
and 2021:

                                                    Three months ended September 30,
                                                      2022                     2021             Change
                                                                          (in thousands)
Personnel related (including stock-based
compensation)                                   $          2,699         $          1,567     $    1,132
Professional and consulting fees                             817                      942           (125 )
Facility-related and other                                 1,326                    1,365            (39 )

Total general and administrative expenses $ 4,842 $


        3,874     $      968




General and administrative expenses were $4.8 million for the three months ended
September 30, 2022 compared to $3.9 million for the three months ended September
30, 2021. The increase in general and administrative costs of $0.9 million was
primarily due to:


An increase of $1.1 million in personnel costs primarily due to hiring in our
general and administrative functions as we continued to expand our operations to
support the organization, which includes increased stock compensation expense
stemming from additional stock option and RSU grants;

A decrease of $0.1 million in professional and consulting fees related to decreased consulting fees in support of financial planning; and

An immaterial decrease in facility-related and other expenses primarily due to a decrease in director and officer insurance expense that was offset by an increase in information technology infrastructure costs for additional personnel, as compared to same quarter in 2021.


                                       23
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Other Income (Expense), Net

Other income (expense), net in the three months ended September 30, 2022 was
comprised of $0.2 million in interest income from our marketable securities and
operating cash balance and $0.6 million of net accretion income on our
marketable securities. Other income (expense), net in the three months ended
September 30, 2021 was comprised of $0.2 million in interest income from our
marketable securities and operating cash balance offset by $0.1 million of net
amortization expense on our marketable securities.

Comparison of Nine Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021:




                                                     Nine months ended September 30,
                                                       2022                   2021             Change
                                                                         (in thousands)
Operating expenses
Research and development                         $         42,364       $         23,655     $   18,709
General and administrative                                 14,288                  9,464          4,824
Total operating expenses                                   56,652                 33,119         23,533
Loss from operations                                      (56,652 )              (33,119 )      (23,533 )
Interest and other income (expense), net                    1,286                   (473 )        1,759
Net loss                                         $        (55,366 )     $        (33,592 )   $  (21,774 )

Research and Development Expenses

The following table summarizes our research and development expenses for the nine months ended September 30, 2022 and 2021:




                                                   Nine months ended September 30,
                                                     2022                  2021             Change
                                                                      (in thousands)
Direct research and development program
expense:
FCR001 clinical and pre-clinical programs       $        11,405       $         6,220     $    5,185
Indirect research and development expenses:
Personnel related (including stock-based
compensation)                                            21,366                12,729          8,637
Facilities and other operating costs                      9,593                 4,706          4,887
Total research and development expenses         $        42,364       $        23,655     $   18,709




Research and development activities are central to our business model. We expect
that our research and development expenses will continue to increase
substantially for the foreseeable future as we advance FCR001 through clinical
trials, including our FREEDOM- 1 Phase 3 clinical trial, and we continue to
develop additional product candidates.

Research and development expenses were $42.4 million for the nine months ended September 30, 2022, compared to $23.7 million for the nine months ended September 30, 2021. The increase of $18.7 million was primarily due to:

An increase of $8.6 million in personnel costs related to (i) the need for additional staff to conduct our FREEDOM-1 Phase 3 clinical trial and our FREEDOM-2 and FREEDOM-3 Phase 2 clinical trials, (ii) advance pre-clinical activities, including those related to our deceased donor program, (iii) support medical affairs and patient recruitment activities, and (iv) increases in stock-based compensation expense related to additional stock option and RSU grants in 2022;


An increase of $5.2 million in direct FCR001 clinical program expenses related
to increased activity in our FREEDOM-1 Phase 3 trial resulting from treating
additional subjects and activating additional clinical sites, and activating
additional clinical sites in our FREEDOM-2 and FREEDOM-3 Phase 2 clinical
trials; and


An increase of $4.9 million in other costs related to patient advocacy efforts,
medical communications development, consulting, research collaborations,
increased medical conference activity and other services in support of ongoing
and planned clinical trials, and asset impairment.

                                       24
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General and Administrative Expenses



The following table summarizes our general and administrative expenses to
support our business activities for the nine months ended September 30, 2022 and
2021:


                                                     Nine months ended September 30,
                                                      2022                     2021             Change
                                                                          (in thousands)
Personnel related (including stock-based
compensation)                                   $           7,418         $         3,975     $    3,443
Professional and consulting fees                            2,187                   2,027            160
Facility-related and other                                  4,683                   3,462          1,221
Total general and administrative expenses       $          14,288         $         9,464     $    4,824




General and administrative expenses were $14.3 million for the nine months ended
September 30, 2022 compared to $9.5 million for the nine months ended September
30, 2021. The increase in general and administrative costs of $4.8 million was
primarily due to:


An increase of $3.4 million in personnel costs primarily due to hiring in our
general and administrative functions as we continued to expand our operations to
support the organization, which includes increased stock compensation expense
stemming from additional stock option and RSU grants;


An increase of $1.2 million in facility-related and other expenses primarily due
to director and officer insurance expense for four additional months compared to
2021; and

An increase of $0.2 million in professional and consulting fees related to increased accounting and consulting fees necessary to comply with public company reporting requirements.



Other Income (Expense), Net

Other income (expense), net in the nine months ended September 30, 2022 was
comprised of $0.6 million in interest income from our marketable securities and
operating cash balance and $0.7 million of net accretion income on our
marketable securities. Other income (expense), net in the nine months ended
September 30, 2021 was comprised of $0.6 million in interest income from our
marketable securities and operating cash balance, offset by $0.4 million of net
amortization expense on our marketable securities, and $0.7 million in expense
related to a fair value adjustment of our contingent stock liability.

Liquidity and Capital Resources



Since our inception, we have incurred significant operating losses. We have not
yet commercialized any products and we do not expect to generate revenue from
sales of products for several years, if at all. Since 2018, we have funded our
operations primarily with proceeds from the sale of our convertible preferred
stock and our IPO in May 2021. Through September 30, 2022, we had received net
proceeds of $186.2 million from sales of our convertible preferred stock and net
proceeds of $137.2 million, after deducting underwriting discounts and
commissions and other expenses, from our IPO.

Cash in excess of immediate requirements is invested in accordance with our
investment policy, primarily with a view to liquidity and capital preservation.
Our primary use of cash is to fund operating expenses, which consist primarily
of research and development expenditures, and to a lesser extent, general and
administrative expenditures. Cash used to fund operating expenses is impacted by
the timing of when we pay these expenses, as reflected in the change in our
outstanding accounts payable and accrued expenses. As of September 30, 2022, we
had cash and cash equivalents of $18.5 million and marketable securities of
$175.4 million.

Cash Flows



The following table summarizes our sources and uses of cash for each of the
periods presented:

                                                     Nine months ended September 30,
                                                       2022                   2021             Change
                                                                         (in thousands)
Net cash used in operating activities            $        (46,987 )     $        (30,158 )   $  (16,829 )
Net cash provided by (used in) investing
activities                                                 46,659                (97,108 )      143,767
Net cash provided by financing activities                     182                136,988       (136,806 )
Net increase in cash and cash equivalents and
restricted cash                                  $           (146 )     $          9,722     $   (9,868 )




                                       25

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Cash Flow from Operating Activities



During the nine months ended September 30, 2022, operating activities used $47.0
million of cash, due to our net loss of $55.4 million and $0.9 million of cash
used from changes in our operating assets and liabilities, partially offset by
non-cash charges of $9.3 million. Net cash used from changes in our operating
assets and liabilities primarily consisted of a $1.7 million increase in
prepaids and other current assets driven by annual director and officer
insurance premiums, timing of CRO prepaids, and deferred offering costs related
to our registration statement on Form S-3 and a $0.4 million decrease in
operating lease liability driven by lease payments. These were offset by an
increase of $0.6 million in accounts payable and accrued expenses driven by
compensation related accruals and $0.1 million increase in other liabilities.
Non-cash charges primarily consisted of $8.1 million of stock-based compensation
expense, $0.4 million of depreciation on fixed assets and amortization of
marketable securities, $0.6 million of amortization of right-of-use assets, and
$0.2 million of asset impairment.

During the nine months ended September 30, 2021, operating activities used $30.2
million of cash, due to our net loss of $33.6 million and $0.9 million of cash
used from changes in our operating assets and liabilities, partially offset by
non-cash charges of $4.3 million. Net cash used from changes in our operating
assets and liabilities primarily consisted of a $2.2 million increase in
prepaids and other current assets driven by annual director and officer
insurance premiums and a $0.1 million increase in other assets related to
deposits for our Wellesley, MA amended lease agreement. These were offset by a
$1.4 million increase in accounts payable and accrued expenses driven by
increased accrued CRO costs and increase compensation related accruals as a
result of increased headcount. Non-cash charges primarily consisted of $2.8
million of stock-based compensation expense, $0.7 million of expense related to
the fair value adjustment of our contingent stock liability and $0.8 million of
depreciation expense on fixed assets and amortization of marketable securities.

Cash Flow from Investing Activities

During the nine months ended September 30, 2022, investing activities provided $46.7 million of cash, due to maturities of marketable securities of $190.0 million, partially offset by purchases of marketable securities of $140.6 million and purchases of property and equipment of $2.8 million.



During the nine months ended September 30, 2021, investing activities used $97.1
million of cash, due to purchases of marketable securities of $210.8 million and
purchases of property and equipment of $1.2 million, partially offset by
maturities of marketable securities of $114.9 million.

Cash Flow from Financing Activities



During the nine months ended September 30, 2022, net cash provided by financing
activities was $0.2 million primarily consisting of proceeds from ESPP share
issuances and exercise of stock options.

During the nine months ended September 30, 2021, net cash provided by financing
activities was $137.0 million, primarily consisting of net proceeds after
deducting underwriting discounts and commissions of $139.5 million from our IPO
and $0.1 million of proceeds from exercise of stock options partially offset by
other IPO expenses paid of $2.4 million and payment in satisfaction of ULRF
contingent stock liability of $0.3 million.

Future Funding Requirements



We expect our expenses to increase substantially in connection with our ongoing
activities, particularly as we advance the late-stage clinical development of
our product candidates. In addition, we expect to incur additional costs
associated with operating as a public company. The timing and amount of our
operating expenditures will depend largely on:


the initiation, progress, timing, costs and results of preclinical studies and
clinical trials for our product candidates or any future product candidates we
may develop;


the outcome, timing and cost of seeking and obtaining regulatory approvals from
the FDA and comparable foreign regulatory authorities, including the potential
for such authorities to require that we perform more preclinical studies or
clinical trials than those that we currently expect or change their requirements
on studies that had previously been agreed to;


the cost to establish, maintain, expand, enforce and defend the scope of our
intellectual property portfolio, including the amount and timing of any payments
we may be required to make, or that we may receive, in connection with
licensing, preparing, filing, prosecuting, defending and enforcing any patents
or other intellectual property rights;

the effect of competing technological and market developments;


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the costs of continuing to grow our business, including hiring key personnel and maintaining or acquiring operating space;


market acceptance of any approved product candidates, including product pricing,
as well as product coverage and the adequacy of reimbursement by third-party
payors;

the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;

the cost and timing of selecting, auditing and potentially validating or expanding a manufacturing site for commercial-scale manufacturing;

the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval and that we determine to commercialize; and

our need to implement additional internal systems and infrastructure, including financial and reporting systems.



We believe that our existing cash and cash equivalents and marketable securities
as of September 30, 2022, will enable us to fund our operating expenses and
capital expenditure requirements through 2024. We have based this estimate on
assumptions that may prove to be wrong, and we could exhaust our available
capital resources sooner than we expect. We expect that we will require
additional funding to (i) further develop FCR001 in our ongoing Phase 3
registrational trial, FREEDOM-1, through evaluation of its primary endpoint,
including in-house manufacturing and quality assurance of clinical trial
material, third-party clinical trials costs, clinical development and trial
management, and personnel associated with each; (ii) continue research and
development of FCR001 in additional pipeline programs such as living donor
kidney transplant delayed tolerance induction and scleroderma in our FREEDOM-2
and FREEDOM-3 trials, respectively, through evaluation of their primary
endpoints, including in-house manufacturing and quality assurance of clinical
trial material, third-party clinical trials costs, clinical development and
trial management, and personnel associated with each; (iii) develop expanded
Chemistry Manufacturing and Controls ("CMC") operations to facilitate scale-up
and commercialization of FCR001, or to engage a third-party manufacturer to
undertake such commercialization; and (iv) develop our preclinical programs
towards Investigational New Drug application ("IND") filings and/or into
clinical trials. If we receive regulatory approval for any of product
candidates, we expect to incur significant commercialization expenses related to
product manufacturing, sales, marketing and distribution, depending on where we
choose to commercialize those product candidates ourselves.

Developing pharmaceutical products, including conducting preclinical studies and
clinical trials, is a time-consuming, expensive and uncertain process that takes
years to complete, and we may never generate the necessary data or results
required to obtain marketing approval for any product candidates or generate
revenue from the sale of any product candidate for which we may obtain marketing
approval. In addition, our product candidates, if approved, may not achieve
commercial success. Our commercial revenues, if any, will be derived from sales
of drugs that we do not expect to be commercially available for many years, if
ever. Accordingly, we will need to obtain substantial additional funds to
achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at
all. We do not currently have any committed external source of funds. Until such
time, if ever, as we can generate substantial product revenue, we expect to
finance our cash needs through a combination of equity offerings, royalty-based
financings, debt financings, collaborations, strategic alliances, and marketing,
distribution or licensing arrangements with third parties. To the extent that we
raise additional capital through the sale of equity or convertible debt
securities, ownership interest may be materially diluted, and the terms of such
securities could include liquidation or other preferences that adversely affect
your rights as a common stockholder. Debt financing, royalty-based financing and
preferred equity financing, if available, may involve agreements that include
restrictive covenants that limit our ability to take specified actions, such as
incurring additional debt, making capital expenditures or declaring dividends.
If we raise funds through royalty-based financings, collaborations, strategic
alliances or marketing, distribution or licensing arrangements with third
parties, we may have to relinquish valuable rights to our technologies, future
revenue streams, research programs or product candidates or grant licenses on
terms that may not be favorable to us. If we are unable to raise additional
funds through equity or debt financings or other arrangements when needed, we
may be required to delay, reduce or eliminate our product development or future
commercialization efforts, or grant rights to develop and market product
candidates that we would otherwise prefer to develop and market ourselves.

On August 15, 2022, we filed a registration statement on Form S-3 (the
"registration statement") pursuant to which we may elect to issue and sell, from
time to time, in one or more series or classes, up to $250.0 million in
aggregate principal amount of common stock, preferred stock, debt securities,
warrants and/or units, in any combination, together or separately, in one or
more offerings in amounts and on such minimum prices and terms that we will
determine at the time of offering. Each time we sell securities described in the
registration statement, a supplemental prospectus will be provided to specify
the terms of the securities being offered. On August 15, 2022, we also entered
into the 2022 Sales Agreement with SVB, pursuant to which we may elect to issue
and sell shares of common stock having an aggregate offering price of up to
$75.0 million in such quantities and on such minimum price terms as we set from
time to time through SVB as the sales agent. The Company agreed to pay SVB an
aggregate commission rate of up to 3.0% of the gross proceeds of the sales price
per share for common stock sold through SVB under the 2022 Sales Agreement.

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Contractual Obligations



We are currently a party to four operating leases for our manufacturing facility
in Louisville, Kentucky, laboratory space in Houston, Texas, corporate office
space in Wellesley, Massachusetts, and additional corporate office space in
Louisville, Kentucky. The future minimum lease obligations for these leases
total $3.5 million over the next four years. Furthermore, as discussed elsewhere
in this quarterly report, we are a party to the ULRF License Agreement. Under
the terms of the ULRF License Agreement, the Company is obligated to compensate
ULRF three percent of net sales of all licensed products sold, one third of any
non-royalty sublicensing income, and up to $1.625 million in regulatory and
sales milestones on each licensed product upon occurrence of specific events as
outlined in the ULRF License Agreement; and annual license maintenance fees.

We have entered into other contracts in the normal course of business with
certain CROs and other third parties for nonclinical research studies and
testing, as well as clinical trials. These contracts do not contain any minimum
purchase commitments and are cancelable by us upon prior notice. Payments due
upon cancellation consist only of payments for services provided and expenses
incurred, including non-cancelable obligations of our service providers, up to
the date of cancellation.

Critical Accounting Policies and Estimates



Our management's discussion and analysis of financial condition and results of
operations is based on our financial statements, which are prepared in
accordance with generally accepted accounting principles ("GAAP") in the United
States. The preparation of our financial statements and related disclosures
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, costs and expenses, and the disclosure of contingent assets
and liabilities in our financial statements. We base our estimates on historical
experience, known trends and events and various other factors that we believe
are reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. We evaluate our estimates and
assumptions on an ongoing basis. Our actual results may differ from these
estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2
to our accompanying financial statements, we believe that the following
accounting policies are those most critical to the judgments and estimates used
in the preparation of our financial statements.

Research and Development Contract Costs and Accruals



As part of the process of preparing our financial statements, we are required to
estimate our accrued research and development expenses. This process involves
reviewing open contracts and purchase orders, communicating with our applicable
personnel to identify services that have been performed on our behalf and
estimating the level of service performed and the associated cost incurred for
the service when we have not yet been invoiced or otherwise notified of actual
costs. The majority of our service providers invoice us in arrears for services
performed, on a pre-determined schedule or when contractual milestones are met;
however, some require advance payments. We makes estimates of our accrued
expenses as of each balance sheet date in the financial statements based on
facts and circumstances known to us at that time. We periodically confirm the
accuracy of these estimates with the service providers and make adjustments, if
necessary. Examples of estimated accrued research and development expenses
include fees paid to vendors in connection with clinical development activities
and CROs and investigative sites in connection with pre-clinical, non-clinical,
and human clinical trials.

We base the expense recorded related to external research and development on our
estimates of the services received and efforts expended pursuant to quotes and
contracts with multiple CROs that supply, conduct and manage clinical trials on
our behalf. The financial terms of these agreements are subject to negotiation,
vary from contract to contract and may result in uneven payment flows. 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. In accruing service
fees, we estimate the time period over which services will be performed and the
level of effort to be expended in each period. If the actual timing of the
performance of services or the level of effort varies from the estimate, we
adjust the accrual or the amount of prepaid expenses accordingly. Although we do
not expect our estimates to be materially different from amounts actually
incurred, our understanding of the status and timing of services performed
relative to the actual status and timing of services performed may vary and may
result in reporting amounts that are too high or too low in any particular
period. To date, there have not been any material adjustments to our prior
estimates of accrued research and development expenses. There have been no
changes to our process of determining external research and development expense
accruals during the three and nine months ended September 30, 2022.

Stock Based Compensation Expense



We measure stock-based awards granted to employees, directors, and nonemployees
based on their fair value on the date of the grant and recognize compensation
expense for those awards over the requisite service period, which is generally
the vesting period of the respective award. For stock-based awards with
service-based vesting conditions, we recognize compensation expense using the
straight-line method. 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 expected stock
price volatility, the expected term

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of the option, the risk-free interest rate for a period that approximates the
expected term of the option, and our expected dividend yield. The fair value of
each option to purchase common stock award is estimated on the date of grant
based on the fair value of our common stock on that same date.

As there had been no public market for our common stock prior to the closing of
our IPO, the estimated fair value of our common stock was determined by our
board of directors as of the date of each option grant with input from
management, considering our most recently available third-party valuations of
common stock, and our board of directors' assessment of additional objective and
subjective factors that it believed were relevant and which may have changed
from the date of the most recent valuation through the date of the grant. These
independent third-party valuations of our equity instruments were performed
contemporaneously with identified value inflection points. Our common stock
valuation was prepared using the option-pricing method ("OPM"), which used a
market approach to estimate our enterprise value, as well as the
probability-weighted expected return method ("PWERM") and the hybrid method, a
combination of OPM and PWERM.

For all stock-based awards granted after the closing of our IPO, we have not had
to estimate the fair value of our common stock as it has been determined based
on the quoted market price of our common stock. For the three and nine months
ended September 30, 2022, the quoted market price of our common stock was used
in determining the fair value of our stock based compensation awards and no
other significant estimates were used in determining those amounts.

Emerging Growth Company and Smaller Reporting Status



In April 2012, the Jumpstart Our Business Startups Act of 2012 ("JOBS Act") was
enacted. Section 107 of the JOBS Act provides that an "emerging growth company"
("EGC") can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act of 1933, as amended ("Securities Act"), for
complying with new or revised accounting standards. Thus, an EGC can delay the
adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have elected to use the extended transition
period for new or revised accounting standards during the period in which we
remain an emerging growth company; however, we may adopt certain new or revised
accounting standards early to the extent allowed by the standard.

We will remain an emerging growth company until the earliest to occur of: (i)
the last day of the fiscal year in which we have more than $1.235 billion in
annual revenue; (ii) the date we qualify as a "large accelerated filer," with at
least $700.0 million of equity securities held by non-affiliates; (iii) the date
on which we have issued more than $1.0 billion in non-convertible debt
securities during the prior three-year period; and (iv) the last day of the
fiscal year ending after the fifth anniversary of our initial public offering.

We are also a "smaller reporting company" meaning that the market value of our
stock held by non-affiliates is less than $700 million and our annual revenue
was less than $100 million during the most recently completed fiscal year. We
may continue to be a smaller reporting company if either (i) the market value of
our stock held by non-affiliates is less than $250 million or (ii) our annual
revenue was less than $100 million during the most recently completed fiscal
year and the market value of our stock held by non-affiliates is less than $700
million. If we are a smaller reporting company at the time we cease to be an
emerging growth company, we may continue to rely on exemptions from certain
disclosure requirements that are available to smaller reporting companies.
Specifically, as a smaller reporting company we may choose to present only the
two most recent fiscal years of audited financial statements in our Annual
Report on Form 10-K and, similar to emerging growth companies, smaller reporting
companies have reduced disclosure obligations regarding executive compensation.

Off-Balance Sheet Arrangements



We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined in the rules and regulations of the
Securities and Exchange Commission.

Recently Issued and Adopted Accounting Pronouncements



A description of recently issued accounting pronouncements that may potentially
impact our financial position and results of operations is disclosed in Note 2
to our financial statements appearing at the beginning of this Quarterly Report.

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