rna-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________________________________

FORM 10-Q

_____________________________________________________


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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023


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

Commission File Number 001-39321

_____________________________________________________

Avidity Biosciences, Inc.

(Exact name of registrant as specified in its charter)

_____________________________________________________


Delaware						46-1336960
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)

10578 Science Center Drive, Suite 125 San Diego, California						92121
(Address of principal executive offices)						(Zip Code)

(858) 401-7900

(Registrant’s telephone number, including area code)

_____________________________________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	RNA	The Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 23, 2023, the registrant had 74,101,254 shares of common stock outstanding.

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Avidity Biosciences, Inc.

FORM 10-Q

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements (unaudited)	3
	Condensed Balance Sheets (unaudited)	3
	Condensed Statements of Operations and Comprehensive Loss (unaudited)	4
	Condensed Statements of Stockholders' Equity (unaudited)	5
	Condensed Statements of Cash Flows (unaudited)	7
	Notes to Condensed Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	29

SIGNATURES		30

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PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements (unaudited)

Avidity Biosciences, Inc.

Condensed Balance Sheets

(in thousands, except par value)


	September 30, 2023		December 31, 2022
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	85,650	$	340,396
Marketable securities	456,933		270,331
Prepaid and other assets	12,904		12,215
Total current assets	555,487		622,942
Property and equipment, net	8,130		6,254
Restricted cash	295		251
Right-of-use assets	8,907		8,755
Other assets	344		598
Total assets	$	573,163	$	638,800
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	31,981	$	32,572
Accrued compensation	11,165		11,190
Lease liabilities, current portion	3,602		3,105
Deferred revenue, current portion	1,968		5,041
Total current liabilities	48,716		51,908
Lease liabilities, net of current portion	6,979		7,582
Deferred revenue, net of current portion	—		1,235
Total liabilities	55,695		60,725
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.0001 par value; authorized shares – 400,000; issued and outstanding shares – 74,101 and 69,768 at September 30, 2023 and December 31, 2022, respectively	7		7
Additional paid-in capital	1,029,660		939,310
Accumulated other comprehensive loss	(1,878)		(2,698)
Accumulated deficit	(510,321)		(358,544)
Total stockholders’ equity	517,468		578,075
Total liabilities and stockholders’ equity	$	573,163	$	638,800

See accompanying notes.

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Avidity Biosciences, Inc.

Condensed Statements of Operations and Comprehensive Loss

(in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Collaboration revenue	$	2,818	$	2,482	$	7,367	$	6,455
Operating expenses:
Research and development	47,714		37,317		138,151		104,794
General and administrative	13,729		10,094		38,071		27,349
Total operating expenses	61,443		47,411		176,222		132,143
Loss from operations	(58,625)		(44,929)		(168,855)		(125,688)
Other income (expense):
Interest income	6,280		1,342		17,567		2,203
Other expense	(13)		(12)		(489)		(39)
Total other income	6,267		1,330		17,078		2,164
Net loss	(52,358)		(43,599)		(151,777)		(123,524)
Other comprehensive income (loss):
Net unrealized gains (losses) on marketable securities	788		(477)		820		(3,276)
Comprehensive loss	$	(51,570)	$	(44,076)	$	(150,957)	$	(126,800)
Net loss per share, basic and diluted	$	(0.71)	$	(0.82)	$	(2.11)	$	(2.45)
Weighted-average shares outstanding, basic and diluted	74,097		53,069		71,987		50,432

See accompanying notes.

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Avidity Biosciences, Inc.

Condensed Statements of Stockholders' Equity

(in thousands)

(unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2022	69,768	$	7	$	939,310	$	(2,698)	$	(358,544)	$	578,075
Issuance of common stock upon exercise of stock options	102	—		520		—		—		520
Issuance of common stock in public offering, net of issuance costs of $408	943	—		22,441		—		—		22,441
Stock-based compensation	—	—		9,104		—		—		9,104
Net loss	—	—		—		—		(52,394)		(52,394)
Other comprehensive income	—	—		—		1,169		—		1,169
Balance at March 31, 2023	70,813	$	7	$	971,375	$	(1,529)	$	(410,938)	$	558,915
Issuance of common stock upon exercise of stock options	12	—		7		—		—		7
Issuance of common stock in public offerings, net of issuance costs of $977	3,164	—		38,106		—		—		38,106
Issuance of common stock under Employee Stock Purchase Plan	81	—		859		—		—		859
Stock-based compensation	—	—		9,453		—		—		9,453
Net loss	—	—		—		—		(47,025)		(47,025)
Other comprehensive loss	—	—		—		(1,137)		—		(1,137)
Balance at June 30, 2023	74,070	$	7	$	1,019,800	$	(2,666)	$	(457,963)	$	559,178
Issuance of common stock upon exercise of stock options	31	—		40		—		—		40


Stock-based compensation	—	—		9,820		—		—		9,820
Net loss	—	—		—		—		(52,358)		(52,358)
Other comprehensive income	—	—		—		788		—		788
Balance at September 30, 2023	74,101	$	7	$	1,029,660	$	(1,878)	$	(510,321)	$	517,468

See accompanying notes.

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Avidity Biosciences, Inc.

Condensed Statements of Stockholders' Equity

(in thousands)

(unaudited)


	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	47,754	$	5	$	566,161	$	(187)	$	(184,549)	$	381,430
Issuance of common stock upon exercise of stock options	7	—		10		—		—		10
Vesting of early exercise options	—	—		1		—		—		1
Issuance of common stock in public offerings, net of issuance costs of $745	1,520	—		24,103		—		—		24,103
Stock-based compensation	—	—		6,238		—		—		6,238
Net loss	—	—		—		—		(34,235)		(34,235)
Other comprehensive loss	—	—		—		(1,839)		—		(1,839)
Balance at March 31, 2022	49,281	$	5	$	596,513	$	(2,026)	$	(218,784)	$	375,708
Issuance of common stock upon exercise of stock options	5	—		4		—		—		4
Issuance of common stock in public offerings, net of issuance costs of $1,184	2,746	—		38,281		—		—		38,281
Issuance of common stock under Employee Stock Purchase Plan	49	—		499		—		—		499
Vesting of early exercise options	—	—		1		—		—		1
Stock-based compensation	—	—		6,508		—		—		6,508
Net loss	—	—		—		—		(45,690)		(45,690)
Other comprehensive loss	—	—		—		(960)		—		(960)
Balance at June 30, 2022	52,081	$	5	$	641,806	$	(2,986)	$	(264,474)	$	374,351
Issuance of common stock upon exercise of stock options	270	—		303		—		—		303
Issuance of common stock in public offerings, net of issuance costs of $1,216	2,095	—		39,317		—		—		39,317
Vesting of early exercise options	—	—		1		—		—		1
Stock-based compensation	—	—		7,086		—		—		7,086
Net loss	—	—		—		—		(43,599)		(43,599)
Other comprehensive loss	—	—		—		(477)		—		(477)
Balance at September 30, 2022	54,446	$	5	$	688,513	$	(3,463)	$	(308,073)	$	376,982

See accompanying notes.

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Avidity Biosciences, Inc.

Condensed Statements of Cash Flows

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(151,777)	$	(123,524)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	1,486		1,006
Stock-based compensation expense	28,377		19,832
Amortization of premiums and discounts on marketable securities, net	(8,037)		184

Non-cash operating lease costs	2,154		2,068
Changes in operating assets and liabilities:
Prepaid and other assets	(435)		(3,242)
Accounts payable and accrued liabilities	(588)		12,028
Accrued compensation	(25)		(1,193)
Operating lease liabilities	(2,412)		(1,002)
Deferred revenue	(4,308)		(3,236)
Net cash used in operating activities	(135,565)		(97,079)
Cash flows from investing activities
Maturities of marketable securities	229,450		85,975
Purchases of marketable securities	(407,195)		(266,189)
Purchases of property and equipment	(3,365)		(1,973)
Net cash used in investing activities	(181,110)		(182,187)
Cash flows from financing activities
Proceeds from issuance of common stock in public offerings, net of issuance costs	60,547		101,701
Proceeds from issuance of common stock under employee incentive equity plans	1,426		816
Net cash provided by financing activities	61,973		102,517
Net decrease in cash, cash equivalents and restricted cash	(254,702)		(176,749)
Cash, cash equivalents and restricted cash at beginning of period	340,647		320,699
Cash, cash equivalents and restricted cash at end of period	$	85,945	$	143,950

Supplemental schedule of noncash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities	$	1,741	$	—

See accompanying notes.

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Avidity Biosciences, Inc.

Notes to Unaudited Condensed Financial Statements

1. Description of Business and Basis of Presentation

Description of Business

Avidity Biosciences, Inc. (the Company or Avidity) is a biopharmaceutical company committed to delivering a new class of RNA therapeutics called Antibody Oligonucleotide Conjugates (AOCs). The Company’s proprietary AOC platform is designed to combine the specificity of monoclonal antibodies with the precision of RNA therapeutics to target the root cause of diseases previously untreatable with such therapeutics.

Liquidity

On June 16, 2020, the Company completed its initial public offering (IPO), and it has since raised additional capital in the public markets as described further in Note 8 (Stockholders’ Equity).

To date, the Company has devoted substantially all of its resources to organizing and staffing the Company, business planning, raising capital, developing its proprietary AOC platform, identifying potential product candidates, establishing its intellectual property portfolio, conducting research, preclinical and clinical studies, and providing other general and administrative support for these operations. In addition, the Company has a limited operating history, has incurred operating losses since inception and expects that it will continue to incur net losses into the foreseeable future as it continues the development of its product candidates and development programs. As of September 30, 2023, the Company had an accumulated deficit of $510.3 million and cash, cash equivalents and marketable securities of $542.6 million.

The Company believes that existing cash, cash equivalents and marketable securities will be sufficient to fund the Company’s operations for at least 12 months from the date of the filing of this Form 10-Q. The Company plans to finance its future cash needs through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other arrangements. If the Company is not able to secure adequate additional funding, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or delay or reduce the scope of its planned development programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

Basis of Presentation

The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited interim condensed financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2022 included in the Company’s annual report on Form 10-K filed with the SEC on February 28, 2023.

Immaterial Out of Period Adjustment

During the nine months ended September 30, 2023, the Company identified an immaterial adjustment to research and development expenses that impacted the Company’s previously issued quarterly and annual financial statements. Therefore, the Company recorded an out of period adjustment that decreased research and development expenses for the nine months ended September 30, 2023 by $3.6 million, which related to periods prior to 2023.

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2. Summary of Significant Accounting Policies

Use of Estimates

The Company’s condensed financial statements are prepared in accordance with GAAP, which requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the condensed financial statements and accompanying notes. The most significant estimates in the Company’s condensed financial statements relate to revenue recognition, stock-based compensation, and accrued research and development costs. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are discussed in “Note 2 – Summary of Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on February 28, 2023. There have been no significant changes to these policies during the nine months ended September 30, 2023.

Marketable Securities

The Company’s marketable securities primarily consist of U.S. Government and corporate debt securities. The Company classifies its marketable securities as available-for-sale and records such assets at estimated fair value in the condensed balance sheets, with unrealized gains and losses, if any, reported as a component of other comprehensive income (loss) within the condensed statements of operations and comprehensive loss and as a separate component of stockholders’ equity. The Company classifies marketable securities with remaining maturities greater than one year as current assets because such marketable securities are available to fund the Company’s current operations. Realized gains and losses are calculated on the specific identification method and recorded as interest income. There were no realized gains and losses during the periods presented.

At each balance sheet date, the Company assesses available-for-sale debt securities in an unrealized loss position to determine whether the unrealized loss or any potential credit losses should be recognized in net income (loss). For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through net income (loss). For available-for-sale securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the severity of the impairment, any changes in interest rates, underlying credit ratings and forecasted recovery, among other factors. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded as an allowance in interest income. There have been no impairment or credit losses recognized during the periods presented.

The Company excludes the applicable accrued interest from both the fair value and amortized costs basis of the Company’s available-for-sale securities for purposes of identifying and measuring an impairment. Accrued interest receivable on available-for-sale securities is recorded within prepaid and other assets on the balance sheets. The Company made an accounting policy election to (1) not measure an allowance for credit loss for accrued interest receivable, and (2) to write-off any uncollectible accrued interest receivable as a reversal of interest income in a timely manner, which the Company considers to be in the period in which it determines the accrued interest will not be collected.

See Note 4 (Marketable Securities) for further information.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has established guidelines regarding approved investments, credit quality, diversification, liquidity and maturities of investments, which are designed to maintain safety and liquidity. The Company has not experienced any losses in its accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits are held.

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Accounts Payable and Accrued Liabilities


(in thousands)	September 30, 2023		December 31, 2022
Accounts payable	$	5,550	$	4,637
Accrued non-clinical liabilities	21,006		22,535
Accrued clinical liabilities	5,425		5,400
Total accounts payable and accrued liabilities	$	31,981	$	32,572

Research and Development Costs and Accruals

Research and development costs are expensed as incurred and include salaries, benefits and stock-based compensation associated with research and development personnel, third-party research and development expenses, license fees, laboratory supplies, facilities, overhead costs, and consultants. Nonrefundable advance payments for goods and services that will be used in future research and development activities are capitalized and recorded as expense in the period that the Company receives the goods or when services are performed.

The Company has entered into various research and development contracts with research institutions, clinical research organizations, clinical manufacturing organizations and other companies. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and payments made in advance of performance are reflected in the accompanying condensed balance sheets as prepaid and other assets or accrued liabilities. The Company records accruals for estimated costs incurred for ongoing research and development activities. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the services, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

Upfront and milestone payments to acquire contractual rights to licensed technology are expensed when incurred if there is uncertainty in the Company receiving future economic benefit from the acquired contractual rights. Certain of these contractual rights may require the Company to make additional milestone payments upon initiation of a pivotal trial and the U.S. Food and Drug Administration approval, which are not expected to exceed $10.9 million.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, adjusted for the weighted-average number of common shares outstanding that are subject to repurchase or forfeiture. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the common stock equivalent securities would be anti-dilutive.

Common stock equivalent securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows (in common stock equivalent shares; in thousands):


	September 30,
	2023	2022
Common stock options	12,526	9,093
Restricted stock units	701	—
Performance stock units	750	—
Employee Stock Purchase Plan shares pending issuance	109	27
Total	14,086	9,120

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of the specified effective

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date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (ASU 2016-13), Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment methodology, and establishes additional disclosures related to credit risks. ASU 2016-13 also eliminates the concept of “other-than-temporary” impairment when evaluating available-for-sale debt securities and instead focuses on determining whether any impairment is a result of a credit loss or other factors. An entity will recognize an allowance for credit losses on available-for-sale debt securities rather than an other-than-temporary impairment that reduces the cost basis of the investment. The Company adopted ASU 2016-13 on January 1, 2023. The adoption of the new standard did not have a material impact on the Company’s condensed financial statements.

3. Fair Value Measurements

The Company determines the fair value of its marketable securities based on one or more valuations from its investment and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by an industry-recognized valuation service. Such valuations may be based on the following:

•Level 1—Quoted prices in active markets for identical assets or liabilities.

•Level 2—Observable inputs, such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The following tables summarize the Company’s cash equivalents and marketable securities measured at fair value (in thousands):


			Fair Value Measurements Using
As of September 30, 2023	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
U.S. Treasury securities	$	4,982	$	4,982	$	—	$	—
Marketable securities:
U.S. Treasury securities	443,385		443,385		—		—
U.S. Government agency securities	4,990		—		4,990		—
Negotiable certificates of deposit	7,313		—		7,313		—
Corporate debt securities	1,245		—		1,245		—
Total	$	461,915	$	448,367	$	13,548	$	—

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			Fair Value Measurements Using
As of December 31, 2022	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
U.S. Treasury securities	$	2,498	$	2,498	$	—	$	—
Marketable securities:
U.S. Treasury securities	244,945		244,945		—		—
U.S. Government agency securities	4,966		—		4,966		—
Negotiable certificates of deposit	4,346		—		4,346		—
Corporate debt securities	16,074		—		16,074		—
Total	$	272,829	$	247,443	$	25,386	$	—

4. Marketable Securities

The Company’s marketable securities, which consist of highly liquid marketable debt securities, are classified as available-for-sale and are stated at fair value. The following tables summarize the Company’s marketable securities (in thousands):


As of September 30, 2023	Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
U.S. Treasury securities	1 or less	$	318,419	$	1	$	(1,142)	$	317,278
U.S. Government agency securities	1 or less	5,000		—		(10)		4,990
Negotiable certificates of deposit	1 or less	5,880		—		(21)		5,859
Corporate debt securities	1 or less	1,256		—		(11)		1,245
U.S. Treasury securities	1 - 2	126,786		—		(679)		126,107
Negotiable certificates of deposit	1 - 2	1,470		—		(16)		1,454

Total		$	458,811	$	1	$	(1,879)	$	456,933


As of December 31, 2022	Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
U.S. Treasury securities	1 or less	$	230,349	$	1	$	(2,283)	$	228,067
U.S. Government agency securities	1 or less	5,000		—		(34)		4,966
Negotiable certificates of deposit	1 or less	3,911		1		(57)		3,855
Corporate debt securities	1 or less	16,360		—		(286)		16,074
U.S. Treasury securities	1 - 2	16,919		—		(41)		16,878
Negotiable certificates of deposit	1 - 2	490		1		—		491
Total		$	273,029	$	3	$	(2,701)	$	270,331

The unrealized losses on the Company’s marketable securities of $1.9 million as of September 30, 2023, $0.2 million of which were in a continuous unrealized loss position of greater than 12 months, were caused by interest rate increases which resulted in the decrease in market value of these securities. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, there were no allowances for credit losses at September 30, 2023 and December 31, 2022.

Accrued interest receivable on available-for-sale securities was $2.3 million and $1.3 million at September 30, 2023 and December 31, 2022, respectively. We have not written off any accrued interest receivable for the three or nine months ended September 30, 2023 and 2022.

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5. Collaboration, License and Research Agreements

Research Collaboration and License Agreement with Eli Lilly and Company

In April 2019, the Company entered into a Research Collaboration and License Agreement (the Lilly Agreement) with Eli Lilly and Company (Lilly) for the discovery, development and commercialization of AOC products directed against certain targets in immunology and other select indications on a worldwide basis. In connection with the Lilly Agreement, the Company recognized revenue of $2.8 million and $2.4 million for the three months ended September 30, 2023 and 2022, respectively, and $7.3 million and $6.3 million for the nine months ended September 30, 2023 and 2022, respectively. Collaboration receivables related to the Lilly Agreement were $1.0 million and $2.1 million as of September 30, 2023 and December 31, 2022, respectively, which are included in prepaid and other assets on the condensed balance sheets.

Research Agreement with MyoKardia, Inc.

In December 2020, the Company entered into a research collaboration (the MyoKardia Agreement) with MyoKardia, Inc. (MyoKardia), a wholly-owned subsidiary of Bristol Myers Squibb, to demonstrate the potential utility of AOCs in cardiac tissue by leveraging MyoKardia’s genetic cardiomyopathy platform including, among other aspects, its novel target discovery engine and proprietary cardiac disease models. In connection with the MyoKardia Agreement, the Company recognized an immaterial amount of revenue in each of the periods presented.

Through September 30, 2023, the aggregate funding received from collaboration and research service agreements was $42.3 million. A reconciliation of the closing balance of deferred revenue related to the Company's research collaboration and license agreements is as follows (in thousands):


Balance at December 31, 2022	$	6,276
Revenue recognized that was included in the balance at the beginning of the period	(4,308)
Balance at September 30, 2023	$	1,968

6. Property and Equipment, net

Property and equipment consist of the following (in thousands):


	September 30, 2023		December 31, 2022
Laboratory equipment	$	10,350	$	7,217
Computers and software	127		116
Office furniture and equipment	1,979		1,792
Leasehold improvements	280		249
Property and equipment, gross	12,736		9,374
Less accumulated depreciation	(4,606)		(3,120)
Total property and equipment, net	$	8,130	$	6,254

Depreciation expense related to property and equipment was $0.6 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively, and $1.5 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

7. Commitments and Contingencies

Litigation

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. There are no claims or actions pending or threatened against the Company that, if adversely determined, would in management’s judgment have a material adverse effect on the Company.

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Contractual Obligations

The Company enters into contracts in the normal course of business for contract research services, contract manufacturing services, professional services, and other services and products for operating purposes. These contracts may include certain provisions that could require payments for early termination. The amount of any such termination payments will vary depending on the timing of the termination and the specific terms of the contract.

8. Stockholders’ Equity

Amended and Restated Certificate of Incorporation

On June 16, 2020, the Company’s certificate of incorporation was amended and restated to authorize 400,000,000 shares of common stock and 40,000,000 shares of undesignated preferred stock, each with a par value of $0.0001 per share. There was no preferred stock outstanding during the periods presented in the condensed financial statements.

Common Stock

On July 2, 2021, the Company entered into a sales agreement (the 2021 Sales Agreement) with Cowen and Company, LLC (the Sales Agent), under which the Company may, from time to time, sell shares of its common stock having an aggregate offering price of up to $150.0 million through the Sales Agent. Sales of the Company’s common stock made pursuant to the 2021 Sales Agreement are made under the Company’s shelf registration statement on Form S-3, which became automatically effective upon filing on July 2, 2021 (the Shelf Registration Statement). During the nine months ended September 30, 2022, the Company sold 7,141,761 shares of its common stock pursuant to the 2021 Sales Agreement and received net proceeds of $121.3 million, after deducting offering-related transaction costs and commissions.

On November 8, 2022, the Company entered into a sales agreement (the 2022 Sales Agreement) with the Sales Agent, with substantially similar terms as the 2021 Sales Agreement. Under the 2022 Sales Agreement, the Company may, from time to time, sell shares of its common stock having an aggregate offering price of up to $200.0 million through the Sales Agent. Sales of the shares of common stock, if any, will be made at prevailing market prices at the time of sale, or as otherwise agreed with the Sales Agent. The Company is not obligated to sell, and the Sales Agent is not obligated to buy or sell, any shares of common stock under the 2022 Sales Agreement. Upon entry into the 2022 Sales Agreement, the 2021 Sales Agreement was terminated. During the nine months ended September 30, 2023, the Company sold 4,107,810 shares of its common stock pursuant to the 2022 Sales Agreement and received net proceeds of $60.5 million, after deducting offering-related transaction costs and commissions.

On December 15, 2022, the Company completed a public offering of 13,800,000 shares of its common stock at a public offering price of $17.25 per share. The net proceeds from the offering were $223.8 million, after deducting underwriting discounts, commissions and offering costs of $14.3 million. The shares sold in the offering were registered pursuant to the Company’s Shelf Registration Statement.

Stock Options

Stock option activity for employee and non-employee awards and related information is as follows (in thousands, except per share data):


	Number of Options	Weighted- Average Exercise Price Per Share
Outstanding at December 31, 2022	9,352	$	15.28
Granted	3,885	14.77
Exercised	(145)	3.88
Forfeited/expired	(566)	19.19
Outstanding at September 30, 2023	12,526	$	15.08

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Restricted Stock Units and Performance Stock Units

During the nine months ended September 30, 2023, under the 2020 Incentive Award Plan and the 2022 Employment Inducement Incentive Award Plan, the Company granted restricted stock units (RSUs) and performance stock units (PSUs) to employees of the Company.

RSUs are valued at the market price of a share of the Company’s stock on the date of grant. RSUs vest ratably on an annual basis over a four-year service period and are payable in shares of common stock on the vesting date. Compensation expense for RSUs is recognized on a straight-line basis over the four-year service period. Forfeitures are recorded in the period in which they occur.

The following table summarizes the RSU activity for the nine months ended September 30, 2023 (in thousands, except per share data):


	Number of Shares	Weighted-Average Grant Date Fair Value
Unvested at December 31, 2022	—	$	—
Granted	757	20.03
Vested	—	—
Forfeited	(56)	20.70
Unvested at September 30, 2023	701	$	19.98

During the nine months ended September 30, 2023, the Company granted 750,000 PSUs at a weighted-average grant date fair value of $6.57 per share. The PSUs vest upon achievement of certain clinical milestones and continued employment thereafter. The PSUs have a two-year term and any unvested awards at the end of the term will be forfeited. Compensation expense for PSUs is recognized on a straight-line basis over the requisite service periods when the achievement of the performance condition is determined to be probable. If a performance condition is not determined to be probable or is not met, no stock-based compensation expense is recognized, and any previously recognized expense is reversed. Forfeitures are recognized as a reduction of stock-based compensation expense in the period they occur.

There were no PSUs outstanding as of December 31, 2022. As of September 30, 2023, no PSUs were vested and no stock-based compensation expense was recognized as the performance conditions were not deemed probable.

Employee Stock Purchase Plan

The Company issued 81,005 and 48,760 shares of common stock under the Employee Stock Purchase Plan (ESPP) during the nine months ended September 30, 2023 and 2022, respectively. The Company had an outstanding liability of $0.6 million at September 30, 2023, which is included in accounts payable and accrued liabilities on the condensed balance sheet, for employee contributions to the ESPP for shares pending issuance at the end of the current offering period. As of September 30, 2023, 467,023 shares of common stock were available for issuance under the ESPP.

Stock-Based Compensation Expense

The assumptions used in the Black-Scholes model to determine the fair value of stock option grants were as follows:


	Options		ESPP
	Nine Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
Risk-free interest rate	3.5% - 4.5%	1.5% - 3.4%	5.4%	2.2%
Expected volatility	80% - 82%	85%	76%	79%
Expected term (in years)	5.5 - 6.1	5.5 - 6.1	0.5	0.5
Expected dividend yield	—%	—%	—%	—%

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Risk-Free Interest Rate. The Company bases the risk-free interest rate assumption for equity awards on the rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the award being valued.

Expected Volatility. The expected volatility of stock options is estimated based on the average historical volatilities of common stock of comparable publicly traded companies and the Company's own volatility. The comparable companies are chosen based on their size and stage in the life cycle. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Prior to 2023, the Company exclusively used peer group companies to determine expected volatility.

Expected Term. The Company's limited option exercise history does not provide a reasonable basis for estimating expected term, therefore the Company has estimated the expected life of its stock options using the simplified method, whereby the expected life equals the average of the vesting term and the original contractual term of the option. The expected life assumption for employee stock purchases under the ESPP is six months to conform with the six-month ESPP offering period.

Expected Dividend Yield. The Company’s expected dividend yield assumption is zero as it has never paid dividends and has no present intention to do so in the future.

The allocation of stock-based compensation expense for stock option, RSU awards, PSU awards, and shares purchasable under the ESPP was as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Research and development expense	$	5,611	$	4,151	$	16,325	$	10,948
General and administrative expense	4,209		2,935		12,052		8,884
Total stock-based compensation expense	$	9,820	$	7,086	$	28,377	$	19,832

As of September 30, 2023, the unrecognized compensation cost related to outstanding time-based options and RSUs was $75.1 million and $11.8 million, respectively, which is expected to be recognized over a weighted-average period of 2.7 years and 3.4 years, respectively. Unrecognized compensation cost related to PSUs was $4.9 million. As of September 30, 2023, the unrecognized compensation cost related to stock purchase rights under the ESPP was $0.2 million, which is expected to be recognized over a weighted-average period of 0.2 years.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q and with our audited financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations, both of which are contained in our annual report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission, or SEC, on February 28, 2023.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategies and plans, research and development plans, the timing and likelihood of resolution of the partial clinical hold on our completed Phase 1/2 MARINA clinical trial, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and clinical trials for our product candidates, the timing and likelihood of regulatory filings and approvals for our product candidates, the timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated product development efforts, inflationary pressures, and the ongoing hostilities outside the United States on our business, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors.” The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future even