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 oligonucleotide therapies to target the root cause of diseases previously untreatable with RNA therapeutics.
Initial Public Offering
On June 16, 2020, the Company completed its initial public offering (IPO) in which it sold 16,560,000 shares of common stock at an offering price of $18.00 per share. Proceeds from the IPO, net of underwriting discounts, commissions and offering costs, were $274.1 million.
In addition, each of the following occurred in connection with the completion of the IPO:
|
•
|
the conversion of all outstanding shares of convertible preferred stock into 17,921,069 shares of the Company’s common stock;
|
|
•
|
the adjustment of an outstanding warrant to purchase convertible preferred stock into a warrant to purchase 7,809 shares of the Company’s common stock; and
|
|
•
|
the amendment and restatement of the Company’s certificate of incorporation, authorizing 400,000,000 shares of common stock and 40,000,000 shares of undesignated preferred stock.
|
Follow-on Offering
On August 6, 2021, the Company completed a public offering of 9,200,000 shares of its common stock at a public offering price of $18.00 per share. The net proceeds from the offering were $155.1 million, after deducting underwriting discounts, commissions and offering costs. The shares sold in the offering were registered pursuant to the Company’s shelf registration statement on Form S-3, which became automatically effective upon filing on July 2, 2021 (the Shelf Registration Statement).
Reverse Stock Split
On June 4, 2020, the Company effected a one-for-2.1095 reverse stock split of its common stock (the Reverse Stock Split). The par value and the authorized shares of the common stock were not adjusted as a result of the Reverse Stock Split. All issued and outstanding common stock and the conversion ratio of the convertible preferred stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.
Liquidity
As of September 30, 2021, 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 and conducting research and preclinical 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, 2021, the Company had an accumulated deficit of $146.0 million and cash, cash equivalents and marketable securities of $413.0 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 similar 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.
8
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, 2020 included in the Company’s annual report on Form 10-K filed with the SEC on March 15, 2021.
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 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.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts. Restricted cash represents cash held as collateral for the letter of credit required under the Company’s facility lease and is reported as a long-term asset in the accompanying condensed balance sheets.
Marketable Securities
The Company’s marketable securities consist of 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 any of the periods presented.
At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. When the Company determines that a decline in the fair value below its cost basis is other-than-temporary, the Company recognizes an impairment loss in the period in which the other-than-temporary decline occurred. There have been no other-than-temporary impairments recognized during any of the periods presented.
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 not experienced any losses in such 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. Additionally, the Company has established guidelines regarding approved investments, credit quality, diversification, liquidity and maturities of investments, which are designed to maintain safety and liquidity.
9
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:
|
•
|
Level 1—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 asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
None of the Company’s non-financial assets are recorded at fair value on a non-recurring basis. The carrying amounts reflected in the Company’s condensed balance sheets for prepaid and other assets and accounts payable and accrued liabilities approximate their fair values due to their short-term nature. The carrying value of the Company’s previously outstanding debt approximated fair value due to the interest being reflective of then-current market rates for debt with similar terms and conditions. The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. No transfers between levels have occurred during the periods presented.
See Note 3 (Fair Value Measurements) for information on assets measured at fair value.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the related assets, which ranges from three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term. Repairs and maintenance charges that do not increase the useful life of the assets are charged to operating expenses as incurred.
Impairment of Long-Lived Assets
Long-lived assets consist of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company has not recognized any impairment losses in any of the periods presented in these financial statements.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by management in making decisions regarding resource allocation and assessing performance. The Company manages its operations as a single operating segment in the United States for the purposes of assessing performance and making operating decisions.
Revenue Recognition
To date, all the Company’s revenue has been derived from collaboration and research agreements. The terms of these arrangements include the following types of payments to the Company: non-refundable, upfront license fees; development, regulatory and commercial milestone payments; payments for research and development services provided by the Company or for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products.
10
The Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation.
The Company receives payments from its collaborators based on billing schedules established in each contract. Upfront and other payments may require deferral of revenue recognition to a future period until the Company performs its obligations under its research and collaboration arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.
See Note 5 (Collaboration, License and Research Agreements) for further information.
Research and Development Costs
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.
Upfront and milestone payments to acquire contractual rights to licensed technology are recorded when incurred if there is uncertainty in the Company receiving future economic benefit from the acquired contractual rights.
Patent Costs
Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.
Income Taxes
The Company accounts for income taxes in accordance with Accounting Standards Codification (ASC) 740, Income Taxes, which provides for deferred taxes using the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.
The Company is subject to taxation in the United States and state jurisdictions. As of December 31, 2020, the Company’s tax years since conversion to a corporation are subject to examination by taxing authorities.
Stock-Based Compensation
Stock-based compensation expense for employee and non-employee stock option grants is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period (usually the vesting period) of the stock-based award, net of actual forfeitures during the period. Stock-based compensation expense for employee stock purchases under the Company’s Employee Stock Purchase Plan (the ESPP) is recorded at the estimated fair value of the purchase as of the plan enrollment date and is recognized as expense on a straight-line basis over the applicable six-month ESPP offering period. The estimation of fair value for stock-based compensation requires management to make estimates and judgments about, among other things, the estimated life of options and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.
11
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities. Comprehensive gains (losses) have been reflected in the statements of operations and comprehensive loss for all periods presented.
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. The Company has excluded 22,158 and 106,202 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the three months ended September 30, 2021 and 2020, respectively, and 39,345 and 137,767 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the nine months ended September 30, 2021 and 2020, respectively. 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 potentially dilutive securities would be anti-dilutive due to the Company’s net loss position.
Potentially dilutive 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,
|
|
|
|
2021
|
|
|
2020
|
|
Common stock options issued and outstanding
|
|
|
5,649
|
|
|
|
3,545
|
|
Common stock subject to repurchase or forfeiture
|
|
|
18
|
|
|
|
92
|
|
ESPP shares pending issuance
|
|
|
12
|
|
|
|
19
|
|
Total
|
|
|
5,679
|
|
|
|
3,656
|
|
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, ASU 2020-06 simplifies accounting for the issuance of convertible instruments by removing certain separation models required under existing guidance. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and amends the diluted earnings-per-share (EPS) calculation guidance in certain areas to improve the consistency of EPS calculations. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. The Company early adopted the new standard, effective January 1, 2021, on a modified retrospective basis. The adoption of ASU 2020-06 had no impact on the Company's financial statements and related disclosures.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. 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.
12
3.
|
Fair Value Measurements
|
The Company determines the fair value of its cash equivalents and marketable securities based on one or more valuations from its investment accounting 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 trade prices in active markets for identical assets (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets, yield curves, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, and broker and dealer quotes, as well as other relevant economic measures.
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, 2021
|
|
Total
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
3,016
|
|
|
$
|
—
|
|
|
$
|
3,016
|
|
|
$
|
—
|
|
Total
|
|
$
|
3,016
|
|
|
$
|
—
|
|
|
$
|
3,016
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
As of December 31, 2020
|
|
Total
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Negotiable certificates of deposit
|
|
$
|
720
|
|
|
$
|
—
|
|
|
$
|
720
|
|
|
$
|
—
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
6,679
|
|
|
|
—
|
|
|
|
6,679
|
|
|
|
—
|
|
Total
|
|
$
|
7,399
|
|
|
$
|
—
|
|
|
$
|
7,399
|
|
|
$
|
—
|
|
The Company’s marketable securities, which consist of highly liquid, investment grade 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, 2021
|
|
Maturity
(in years)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Corporate debt securities
|
|
1 or less
|
|
$
|
3,017
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
3,016
|
|
Total
|
|
|
|
$
|
3,017
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
3,016
|
|
As of December 31, 2020
|
|
Maturity
(in years)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Corporate debt securities
|
|
1 or less
|
|
$
|
3,612
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
3,610
|
|
Corporate debt securities
|
|
1 - 2
|
|
|
3,072
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
3,069
|
|
Total
|
|
|
|
$
|
6,684
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
6,679
|
|
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. Under the Lilly Agreement, the Company granted Lilly an exclusive, worldwide, royalty-bearing license, with the right to sublicense (subject to certain conditions), under the Company’s technology to research, develop, manufacture and sell products containing AOCs that are directed to up to six mRNA targets. The Company retains the right to use its technology to perform its obligations under the Lilly Agreement and for all purposes not granted to Lilly. The Company agreed that it will not, itself or with a third party, research, develop,
13
manufacture or commercialize or otherwise exploit any compound or product directed against targets subject to the Lilly Agreement.
In consideration of the rights granted to Lilly under the Lilly Agreement, the Company received a one-time upfront fee of $20.0 million and is eligible to receive up to $60.0 million in development milestone payments, up to $140.0 million in regulatory milestone payments and up to $205.0 million in commercialization milestone payments per target. In addition, Lilly is obligated to reimburse the Company for research expenses, as defined in and incurred under the Lilly Agreement. Lilly is obligated to pay the Company a tiered royalty ranging from the mid-single to low-double digits on worldwide annual net sales of licensed products, subject to specified and capped reductions for the market entry of biosimilar products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory. Lilly’s royalty obligations and the Lilly Agreement will expire on a licensed product-by-licensed product and country-by-country basis on the later of ten years from the date of the first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.
The Company has identified multiple promises to deliver goods and services, which include at inception of the agreement: (i) a license to technology and patents, information and know-how; and (ii) collaboration, including research services, technical and regulatory support provided by the Company. At inception and through September 30, 2021, the Company has identified one performance obligation for all the deliverables under the Lilly Agreement since the delivered elements are either not capable of being distinct or are not distinct within the context of the contract. Accordingly, the Company will recognize revenue for the fixed or determinable collaboration in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the five-year period over which it expects to deliver its performance obligations. The Company periodically reviews and updates the estimated collaboration expenses, when appropriate, which adjusts the percentage of revenue that is recognized for the period. In connection with the Lilly Agreement, the Company recognized revenue of $2.1 million and $1.7 million for the three months ended September 30, 2021 and 2020, respectively, and $7.3 million and $4.6 million for the nine months ended September 30, 2021 and 2020, respectively, and had deferred revenue of $12.0 million and $15.8 million as of September 30, 2021 and December 31, 2020, respectively. Collaboration receivables related to the Lilly Agreement were $0.9 million and $1.2 million as of September 30, 2021 and December 31, 2020, respectively, which are included in prepaid and other assets on the condensed balance sheets.
A reconciliation of the closing balance of deferred revenue related to the Lilly Agreement is as follows (in thousands):
Balance at December 31, 2020
|
|
$
|
15,840
|
|
Revenue recognized
|
|
|
(3,834
|
)
|
Balance at September 30, 2021
|
|
$
|
12,006
|
|
Concurrently with the execution of the Lilly Agreement, the Company issued a convertible promissory note to Lilly (the Lilly Note) and received cash proceeds of $15.0 million. In connection with the Series C financing in November 2019, all outstanding principal and interest accrued under the Lilly Note converted into 4,576,342 shares of Series C convertible preferred stock, which subsequently converted into 2,169,396 shares of common stock in connection with the IPO in June 2020.
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 revenue of a nominal amount and $0.2 million for the three and nine months ended September 30, 2021, respectively.
14
6.
|
Property and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Laboratory equipment
|
|
$
|
4,440
|
|
|
$
|
2,928
|
|
Computers and software
|
|
|
83
|
|
|
|
58
|
|
Office furniture and equipment
|
|
|
40
|
|
|
|
44
|
|
Leasehold improvements
|
|
|
634
|
|
|
|
417
|
|
Property and equipment, gross
|
|
|
5,197
|
|
|
|
3,447
|
|
Less accumulated depreciation
|
|
|
(1,977
|
)
|
|
|
(1,979
|
)
|
Total property and equipment, net
|
|
$
|
3,220
|
|
|
$
|
1,468
|
|
Depreciation expense related to property and equipment was $0.2 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $0.4 million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively.
Term Loan
In June 2017, the Company entered into an amendment (the LSA Amendment) to the Amended and Restated Loan and Security Agreement (as amended, the LSA) with Silicon Valley Bank (SVB). Pursuant to the LSA Amendment, SVB agreed to make loans of up to $7.0 million, comprising (i) a $5.0 million term loan, funded at the closing date (the Term C Loan), and (ii) subject to the achievement of a specified milestone relating to the Company’s research, an additional term loan totaling up to $2.0 million (the Term D Loan), of which $4.1 million was used to repay the Company’s existing loan with SVB, in addition to the final payments totaling $0.4 million.
The Term C Loan was scheduled to mature on June 1, 2021 and bore interest at an adjustable annual rate of the prime rate per the Wall Street Journal plus one-fifth of one percent (0.20%). The LSA Amendment provided an extension of the interest only period through June 1, 2019, upon the Term D Loan advance. Beginning July 1, 2019, the Company was required to repay the principal amount in 36 equal monthly installments, in addition to the monthly interest payment. In addition, a final payment of 6.5% of the funded amount, or $0.3 million, was due on the maturity date. The final payment fee was accrued as interest expense over the term of the loan and recorded in long-term debt, net of current portion.
In August 2018, the Company entered into a second amendment to the LSA (the LSA Second Amendment). Pursuant to the LSA Second Amendment, SVB provided the Term D Loan of $2.0 million, upon the Company’s receipt of $3.0 million in convertible note financing. In addition, a final payment of 6.5% of the funded amount, or $0.1 million, was due on the maturity date. The Company accounted for the financing prospectively as a debt modification.
On June 30, 2020, the Company voluntarily prepaid the aggregate outstanding principal balance of $2.8 million and final payments and accrued interest of $0.5 million related to the Term C and Term D Loans, and the LSA was terminated.
In conjunction with the Term A and Term B Loans, the Company issued a warrant to SVB to purchase up to 16,474 shares of Series A convertible preferred stock at an exercise price of $2.2615 per share, exercisable at any time following the issuance, with a term of ten years. In connection with the completion of the IPO in June 2020, the preferred stock warrant was adjusted to become a warrant exercisable for 7,809 shares of common stock at an exercise price of $4.77 per share. In conjunction with the Term C Loan entered into in June 2017, the Company issued a warrant to SVB to purchase up to 9,442 shares of common stock at an exercise price of $0.53 per share, exercisable at any time following the issuance, with a term of seven years. The Company estimated the fair value of the warrants granted using the Black-Scholes model and recorded the fair value as debt discounts, which were being amortized to interest expense using the effective interest method over the term of the loans. On June 17, 2020, the warrants were cashless exercised for an aggregate of 15,833 shares of common stock.
8.
|
Commitments and Contingencies
|
Lease Agreements
The Company determines if an arrangement is a finance lease, operating lease or short-term lease at inception, or as applicable, and accounts for the arrangement under the relevant accounting literature. Currently, the Company is only party to non-cancellable office and laboratory space operating leases, as well as short-term office and laboratory space leases. Under the relevant guidance, the Company recognizes operating lease right-of-use (ROU) assets and liabilities based on the present value of the future minimum lease payments over the lease term at the commencement date, using the Company’s assumed incremental borrowing rate of 5.5%, and amortizes the ROU assets and liabilities over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company’s short-term leases are not subject to recognition of an ROU asset or liability or straight-line lease expense requirements.
15
In March 2014, the Company entered into a non-cancellable operating lease for office and laboratory space with a lease term through November 2017. In July 2017, the Company entered into an amendment to this lease to extend the lease term through December 2021.
On June 1, 2020, the Company entered into a second amendment to its existing operating lease (as amended, the 2014 Lease) and entered into a new non-cancellable temporary operating lease in connection with a newly executed non-cancellable operating lease for its new headquarters location, with a projected commencement date of July 1, 2021.
On December 18, 2020, the Company entered into an amendment to the non-cancellable operating lease for its new headquarters location (as amended, the New Lease), which increased the square footage by adding adjacent space and extended the projected commencement date to November 1, 2021. Additionally, the non-cancellable temporary operating lease was amended (as amended, the Temporary Lease) to accommodate the projected commencement date of the New Lease. The lease term under both the 2014 Lease and the Temporary Lease ends 15 days after the commencement date of the New Lease in November 2021. The remaining monthly rental payments under the 2014 Lease and the rent under the Temporary Lease were abated beginning on June 1, 2020, given the execution of the New Lease. The New Lease has a five-year term upon commencement in November 2021 and a renewal option for an additional five years. Under the terms of the New Lease, the initial monthly base rent of approximately $251,000 will increase to approximately $282,000 during the last year of the New Lease's initial term, and the first year includes five months of rent abatement. The total lease payments under the initial term of the New Lease of $14.7 million were allocated amongst the 2014 Lease, Temporary Lease and New Lease based on the relative standalone price of the separate lease components. Furthermore, pursuant to the terms of the New Lease, the Company is required to maintain a letter of credit totaling $251,000 throughout the lease term.
In June 2020, in accordance with the lease terms applicable at that time, the Company adjusted the ROU asset and liability of the 2014 Lease to conform to the modification terms and recorded an ROU asset and liability for the Temporary Lease upon occupancy. In December 2020, in connection with the lease amendments described above, the Company adjusted the ROU asset and liability of the 2014 Lease and Temporary Lease to conform to the modification terms. The Company will recognize an ROU asset and liability related to the New Lease upon obtaining control of the asset, which is expected to occur upon occupancy of the new space in November 2021.
As of September 30, 2021, the Company’s ROU assets and liabilities related to the 2014 Lease and the Temporary Lease are as follows (in thousands):
ROU assets (included in other assets)
|
|
$
|
45
|
|
|
|
|
|
|
Lease liabilities, current portion (included in accounts
payable and accrued liabilities)
|
|
$
|
100
|
|
Lease liabilities, net of current portion
|
|
|
877
|
|
Total lease liabilities
|
|
$
|
977
|
|
16
As of September 30, 2021, maturities of the lease liabilities due under the 2014 Lease and the Temporary Lease are as follows (in thousands):
Year ending December 31,
|
|
|
|
|
2021 (remaining)
|
|
$
|
17
|
|
2022
|
|
|
135
|
|
2023
|
|
|
208
|
|
2024
|
|
|
214
|
|
2025
|
|
|
220
|
|
2026
|
|
|
188
|
|
Total lease payments
|
|
|
982
|
|
Less imputed interest
|
|
|
(5
|
)
|
Total operating lease liabilities
|
|
|
977
|
|
Less lease liabilities, current portion
|
|
|
(100
|
)
|
Lease liabilities, net of current portion
|
|
$
|
877
|
|
Supplemental cash flow information related to cash paid for amounts included in the measurement of operating lease liabilities was as follows (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Cash paid included in operating cash flows
|
|
$
|
—
|
|
|
$
|
163
|
|
Rent expense was as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Operating leases
|
|
$
|
150
|
|
|
$
|
119
|
|
|
$
|
449
|
|
|
$
|
285
|
|
Short-term leases
|
|
|
78
|
|
|
|
9
|
|
|
|
159
|
|
|
|
27
|
|
Total rent expense
|
|
$
|
228
|
|
|
$
|
128
|
|
|
$
|
608
|
|
|
$
|
312
|
|
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 matters currently outstanding for which any liabilities have been accrued.
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.
Common Stock
On June 16, 2020, the Company completed its IPO in which it sold 16,560,000 shares of common stock at an offering price of $18.00 per share. Proceeds from the IPO, net of underwriting discounts, commissions and offering costs, were $274.1 million.
On August 6, 2021, the Company completed a public offering of 9,200,000 shares of its common stock at a public offering price of $18.00 per share. The net proceeds from the offering were $155.1 million, after deducting underwriting discounts, commissions and offering costs. The shares sold in the offering were registered pursuant to the Company’s Shelf Registration Statement.
17
Sales Agreement
On July 2, 2021, the Company entered into a sales agreement (the 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 Sales Agreement, if any, will be made under the Company’s Shelf Registration Statement. The Company is not obligated to, and cannot provide any assurances that it will, make any sales of the shares under the Sales Agreement. In addition, the Sales Agreement may be terminated by the Company or the Sales Agent at any time upon ten days’ notice to the other party, or by the Sales Agent, with respect to itself, at any time in certain circumstances, including the occurrence of a material adverse change. To date, there have been no sales of common stock pursuant to the Sales Agreement.
Conversion
On April 1, 2019, Avidity Biosciences LLC (Avidity LLC), a Delaware limited liability company, was converted into Avidity Biosciences, Inc., a Delaware corporation. The entire membership interests of Avidity LLC were converted into securities of Avidity Biosciences, Inc. as follows: (i) each outstanding common unit of Avidity LLC was converted into one share of Avidity Biosciences, Inc.’s common stock; (ii) each outstanding Series A convertible preferred unit of Avidity LLC converted into one share of Avidity Biosciences, Inc.’s Series A convertible preferred stock; and (iii) each outstanding Series B convertible preferred unit of Avidity LLC converted into one share of Avidity Biosciences, Inc.’s Series B convertible preferred stock. All the property, rights, privileges, powers and franchises of Avidity LLC vested in Avidity Biosciences, Inc., and all debts, liabilities and duties of Avidity LLC became debts, liabilities and duties of Avidity Biosciences, Inc. All references to the former members’ equity accounts in Avidity LLC have been adjusted to reflect the equivalent number of Avidity Biosciences, Inc.’s shares of common stock. Upon completion of the conversion, the Company reclassified an accumulated deficit of $44.1 million from predecessor deficit to additional paid-in capital.
Convertible Preferred Stock
In connection with the completion of the IPO in June 2020, all of the outstanding shares of convertible preferred stock were converted into 17,921,069 shares of the Company’s common stock. Prior to conversion, the Company’s convertible preferred stock was classified as temporary equity in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities whose redemption is based upon certain change in control events outside of the Company’s control.
Equity Incentive Plans
In January 2013, the Company adopted the 2013 Equity Incentive Plan (the 2013 Plan). The 2013 Plan provided for the issuance of incentive units to employees and nonemployees of the Company and non‑statutory unit options, restricted unit awards, unit appreciation rights, and unit bonuses to directors, employees and consultants of the Company. Under the 2013 Plan, 2,127,013 units were initially reserved for issuance. Upon the conversion of the Company to a C corporation, the 2013 Plan continued on the same terms and conditions. In 2019, the number of shares reserved under the 2013 Plan was increased to 4,771,615 shares.
In June 2020, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2020 Incentive Award Plan (the 2020 Plan), which became effective in connection with the IPO. Pursuant to the 2020 Plan, the Company ceased granting awards under the 2013 Plan. Under the 2020 Plan, the Company may grant stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, and other stock or cash-based awards to individuals who are then employees, officers, non-employee directors or consultants of the Company. A total of 3,900,000 shares of common stock were initially reserved for issuance under the 2020 Plan. In addition, the number of shares of common stock available for issuance under the 2020 Plan will be increased annually on the first day of each fiscal year during the term of the 2020 Plan, beginning with the 2021 fiscal year, by an amount equal to the lesser of (a) 5% of the shares of common stock outstanding on the final day of the immediately preceding calendar year or (b) such smaller number of shares as determined by the Company’s board of directors. At September 30, 2021, 2,755,467 shares remain available for issuance under the 2020 Plan.
Stock Options
Options granted from the 2013 Plan and 2020 Plan are exercisable at various dates and will expire no more than ten years from their date of grant. Options generally vest over a four-year period. Prior to the IPO, the exercise price of options was determined by the Company’s board of directors. Following the IPO, the Company grants options with an exercise price equal to the fair market value of the Company’s stock on the date of the option grant.
18
Stock option activity for employee and nonemployee 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, 2020
|
|
|
3,788
|
|
|
$
|
9.06
|
|
Granted
|
|
|
2,455
|
|
|
|
23.26
|
|
Exercised
|
|
|
(114
|
)
|
|
|
1.37
|
|
Forfeited/expired
|
|
|
(480
|
)
|
|
|
23.02
|
|
Outstanding at September 30, 2021
|
|
|
5,649
|
|
|
$
|
14.20
|
|
The weighted-average grant date fair value of options granted during the nine months ended September 30, 2021 and 2020 were $16.83 and $10.22 per share, respectively.
Employee Stock Purchase Plan
In June 2020, the Company adopted the ESPP, which permits participants to contribute up to 15% of their eligible compensation during defined rolling six-month periods to purchase the Company’s common stock. The purchase price of the shares will be 85% of the lower of the fair market value of the Company’s common stock on the first day of trading of the offering period or on the applicable purchase date. The Company issued 14,235 and 0 shares of common stock under the ESPP during the nine months ended September 30, 2021 and 2020, respectively. The Company had an outstanding liability of $0.3 million at September 30, 2021, 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 offering period. As of September 30, 2021, 657,475 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 and shares purchasable under the ESPP were as follows:
|
|
Nine Months Ended September 30,
|
Stock Option Grants
|
|
2021
|
|
2020
|
Risk-free interest rate
|
|
0.5% - 1.2%
|
|
0.3% - 1.5%
|
Expected volatility
|
|
87% - 88%
|
|
88% - 92%
|
Expected term (in years)
|
|
5.5 - 6.1
|
|
5.4 - 6.1
|
Expected dividend yield
|
|
—%
|
|
—%
|
|
|
Nine Months Ended September 30,
|
ESPP
|
|
2021
|
|
2020
|
Risk-free interest rate
|
|
0.1%
|
|
0.2%
|
Expected volatility
|
|
75%
|
|
96%
|
Expected term (in years)
|
|
0.5
|
|
0.5
|
Expected dividend yield
|
|
—%
|
|
—%
|
The allocation of stock-based compensation expense was as follows (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Research and development expense
|
|
$
|
2,433
|
|
|
$
|
565
|
|
|
$
|
6,930
|
|
|
$
|
850
|
|
General and administrative expense
|
|
|
2,117
|
|
|
|
731
|
|
|
|
5,610
|
|
|
|
1,582
|
|
Total stock-based compensation expense
|
|
$
|
4,550
|
|
|
$
|
1,296
|
|
|
$
|
12,540
|
|
|
$
|
2,432
|
|
19
As of September 30, 2021, the unrecognized compensation cost related to outstanding time-based options was $48.3 million, which is expected to be recognized over a weighted-average period of 2.9 years. As of September 30, 2021, the unrecognized compensation cost related to stock purchase rights under the ESPP was $0.1 million, which is expected to be recognized over a weighted-average period of 0.2 years.
The COVID-19 outbreak in the United States has caused significant business disruption. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the continued spread of COVID-19 and the measures taken by the governmental authorities, and its impact on the Company’s preclinical studies and clinical trials, employees and vendors, all of which are uncertain and cannot be predicted, particularly as the Company advances its product candidates into and through clinical development. In response to the COVID-19 outbreak, the Company limited the number of on-site staff in its research laboratories as well as other personnel, with the remainder of its employees continuing to work remotely. To date, the Company has not experienced material disruptions in its business operations. However, a prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company, including the timing and ability of the Company to complete certain clinical trials and other efforts required to advance the development of its product candidates and raise additional capital.
20