LENZ Therapeutics, Inc.(LENZ) - 2023 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section contains forward-looking statements based on management's beliefs and assumptions, involving known and unknown risks and uncertainties - This section contains forward-looking statements based on management's beliefs and assumptions, which involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[3][4] - Key areas of forward-looking statements include strategic alternatives, therapeutic potential of product candidates, financial estimates, ability to obtain funding, intellectual property, restructuring effects, and competitive position[3] PART I. FINANCIAL INFORMATION This section presents unaudited condensed financial statements, including balance sheets, statements of operations, and cash flows, along with detailed notes, management's discussion, market risk disclosures, and controls Item 1. Financial Statements (Unaudited) This item presents the company's unaudited condensed financial statements for June 30, 2023, and December 31, 2022, with accompanying notes Condensed Balance Sheets This section presents the company's condensed balance sheets as of June 30, 2023, and December 31, 2022 Condensed Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $128,506 | $47,730 | | Marketable securities | $118,159 | $235,821 | | Total current assets | $251,171 | $275,365 | | Total assets | $287,044 | $321,902 | | Total current liabilities | $12,270 | $13,043 | | Total liabilities | $62,898 | $25,611 | | Total stockholders' equity | $224,146 | $296,291 | | Accumulated deficit | $(321,651) | $(242,403) | Condensed Statements of Operations and Comprehensive Loss This section presents the condensed statements of operations and comprehensive loss for the periods ended June 30, 2023, and 2022 Condensed Statements of Operations and Comprehensive Loss (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $13,508 | $17,777 | $29,752 | $36,023 | | General and administrative | $7,455 | $8,999 | $15,078 | $16,711 | | Restructuring and impairment costs | $37,196 | $— | $39,779 | $— | | Total operating expenses | $58,159 | $26,776 | $84,609 | $52,734 | | Net loss | $(55,314) | $(25,936) | $(79,248) | $(51,771) | | Net loss per share (basic and diluted) | $(0.97) | $(0.48) | $(1.40) | $(0.95) | Condensed Statements of Stockholders' Equity This section details changes in stockholders' equity and accumulated deficit for the periods presented Total Stockholders' Equity and Accumulated Deficit (in thousands) | Date | Total Stockholders' Equity | Accumulated Deficit | | :----------------- | :------------------------- | :------------------ | | December 31, 2022 | $296,291 | $(242,403) | | March 31, 2023 | $276,224 | $(266,337) | | June 30, 2023 | $224,146 | $(321,651) | - Stock-based compensation expense for the six months ended June 30, 2023, was $6.1 million, compared to $6.7 million for the same period in 2022[11][12] Condensed Statements of Cash Flows This section presents the condensed statements of cash flows for the six months ended June 30, 2023, and 2022 Condensed Statements of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(34,729) | $(43,334) | | Net cash provided by (used in) investing activities | $115,389 | $(258,883) | | Net cash provided by financing activities | $116 | $412 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $80,776 | $(301,805) | | Cash, cash equivalents and restricted cash, at end of period | $130,222 | $76,887 | Notes to Condensed Financial Statements These notes provide detailed explanations and disclosures for the condensed financial statements, covering business, liquidity, accounting policies, and key financial components 1. Description of Business, Organization and Liquidity This note describes the company's business, recent strategic changes, and its liquidity position - The company, a clinical-stage gene editing company, voluntarily paused its Phase 1/2 CEDAR study of nula-cel for sickle cell disease in January 2023 due to a serious adverse event likely related to study treatment[15] - In February 2023, the company decided to discontinue nula-cel development and initiated a corporate restructuring, resulting in an approximately 71.2% reduction in force by July 2023, and plans to sublease facilities[15] - As of June 30, 2023, the company had an accumulated deficit of $321.7 million and cash, cash equivalents, and marketable securities of $246.7 million, expected to fund operations for at least the next 12 months[16] - In August 2023, the company entered into a license and option agreement for its nula-cel program and an asset purchase agreement for its pre-clinical non-genotoxic conditioning program[15] 2. Summary of Significant Accounting Policies This note outlines the company's significant accounting policies, including those for financial statements, cash, marketable securities, and leases - Financial statements are prepared in accordance with U.S. GAAP and are unaudited interim condensed statements, reflecting management's estimates for various financial items[18][19][21] - Cash and cash equivalents include highly liquid investments with maturities of three months or less; restricted cash of $1.7 million represents security deposits for leases[22][23] - Marketable securities are classified as available-for-sale and recorded at fair value; operating leases are accounted for by recognizing right-of-use assets and lease liabilities per ASC 842[24][27] - As an emerging growth company, the company has elected to use the extended transition period for complying with new or revised accounting standards[28] 3. Fair Value of Financial Assets This note details the fair value measurements of financial assets using a three-level hierarchy based on input observability - Fair value measurements are categorized into a three-level hierarchy based on input observability: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[29] Fair Value of Cash Equivalents and Marketable Securities (in thousands) | Category | June 30, 2023 Total Fair Value | June 30, 2023 Level 1 | June 30, 2023 Level 2 | December 31, 2022 Total Fair Value | December 31, 2022 Level 1 | December 31, 2022 Level 2 | | :----------------------------------------- | :----------------------------- | :-------------------- | :-------------------- | :--------------------------------- | :------------------------ | :------------------------ | | Total cash equivalents and marketable securities | $246,665 | $132,932 | $113,733 | $283,551 | $111,130 | $172,421 | - As of both June 30, 2023, and December 31, 2022, the company did not hold any Level 3 securities[29] 4. Marketable Securities This note provides details on the company's marketable securities, classified as available-for-sale, including their fair value and unrealized losses - All marketable securities are classified as available-for-sale[32] Marketable Securities Fair Value and Unrealized Losses (in thousands) | Security Type | June 30, 2023 Fair Value | June 30, 2023 Unrealized Losses | December 31, 2022 Fair Value | December 31, 2022 Unrealized Losses | | :---------------------- | :----------------------- | :------------------------------ | :--------------------------- | :---------------------------------- | | U.S. treasuries | $4,426 | $(21) | $65,391 | $(416) | | Commercial paper | $58,071 | $(38) | $115,061 | $(333) | | U.S. agency securities | $53,709 | $(213) | $53,455 | $(327) | | Asset-backed securities | $1,953 | $(5) | $1,914 | $— | | Total | $118,159 | $(277) | $235,821 | $(1,076) | - As of June 30, 2023, the aggregate fair value of securities with remaining maturities of less than one year in an unrealized loss position was $118.2 million. The company determined no material credit loss on investments[33] 5. Balance Sheet Components This note provides a detailed breakdown of specific balance sheet components, including prepaid expenses, property and equipment, and accrued liabilities Prepaid Expenses and Other Current Assets (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------------------------------------- | :------------ | :---------------- | | Advances to suppliers | $39 | $2,486 | | Prepaid insurance | $19 | $1,343 | | Other prepaid expenses | $2,820 | $3,307 | | Total prepaid expenses and other current assets | $2,878 | $7,136 | Property and Equipment, Net (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------------------------- | :------------ | :---------------- | | Total property and equipment, net | $17,965 | $22,630 | Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :---------------------------------------- | :------------ | :---------------- | | Professional fees | $234 | $367 | | Early exercise liability | $55 | $150 | | Other accrued expenses | $3,063 | $1,354 | | Accrued employee termination benefits | $439 | $— | | Total accrued expenses and other current liabilities | $3,791 | $1,871 | 6. Significant Agreements This note outlines key agreements, including the Stanford Exclusive License, Option Agreements, LCGM Service Agreement, and IDT License Agreement - The Stanford Exclusive License Agreement grants a worldwide license for gene editing technology for SCD, XSCID, and beta thalassemia, involving an upfront fee, common stock issuance, annual maintenance fees, future development and regulatory milestone payments (up to $5.3 million), sales-based milestone payments (up to $7.5 million), and low single-digit royalties[38][39] - The First Option Agreement with Stanford was extended for an additional year on June 6, 2023, while the Second Option Agreement was terminated on March 8, 2023[39] - Under the LCGM Service Agreement for nula-cel clinical manufacturing, research and development expense decreased to $1.1 million for the six months ended June 30, 2023, from $2.8 million in the prior year, with no additional expenses expected[40] - The IDT License Agreement provides a non-exclusive license for HiFi Cas9 protein variants, with an upfront payment of $3.0 million and potential regulatory milestone payments up to $5.3 million (or $8.8 million if expanded to additional fields) and low single-digit royalties; no R&D expense was recognized in Q2 2023[41][42] 7. Commitments and Contingencies This note describes the company's commitments related to R&D agreements, license agreements, and potential legal proceedings - The company enters into research and development agreements with CROs and CMOs, which generally provide for termination on notice, with no accrued termination charges as of June 30, 2023[43] - License agreements include contingent development, regulatory, and commercial milestone payments and royalties on future sales, none of which were achieved or probable as of June 30, 2023[44] - Management is not aware of any material legal proceedings or indemnification claims that could adversely affect the company's financial position[45][46] 8. Operating Leases This note details the company's operating lease liabilities, right-of-use assets, and the impact of restructuring on leasehold improvements - As of June 30, 2023, current operating lease liabilities were $2.9 million and non-current were $50.6 million, with a weighted average remaining lease term of 111 months and an incremental borrowing rate of 10.9%[48] - A new lease for office and lab space with Bayside Area Development commenced in April 2023, resulting in a $32.0 million right-of-use asset and corresponding lease liability, and $27.2 million in leasehold improvements[48] - Due to the Restructuring Plan, the company recorded a non-cash impairment of $35.0 million to the Bayside lease right-of-use asset and related leasehold improvements, as it intends to sublease the vacant space[48] Operating Lease Expense (in thousands) | Period | Lease Expense | | :----------------------------------- | :------------ | | Three months ended June 30, 2023 | $2,300 | | Three months ended June 30, 2022 | $1,600 | | Six months ended June 30, 2023 | $4,000 | | Six months ended June 30, 2022 | $3,300 | 9. Common Stock This note provides information on the company's authorized common stock, shares reserved for issuance, and share repurchase activities - The company is authorized to issue 300,000,000 shares of common stock with a $0.00001 par value per share[51] Shares Reserved for Future Issuance | Category | June 30, 2023 | December 31, 2022 | | :---------------------------------------- | :------------ | :---------------- | | Outstanding stock option awards | 9,005,490 | 7,755,303 | | Shares available for future stock option grants | 7,188,823 | 5,382,907 | | ESPP shares available for future grants | 1,253,729 | 754,951 | | Total shares reserved for future issuance | 17,448,042 | 13,893,161 | - As of June 30, 2023, 1,172,289 shares of founders' common stock awards remained unvested, and the company repurchased 152,694 shares during the three and six months ended June 30, 2023[54] - The company exercised its Stanford Adjustment Repurchase Right in June 2021 to repurchase 624,845 shares from founders and an investor, with 16,016 shares remaining subject to repurchase as of June 30, 2023[55] 10. Equity Incentive Plans This note details the company's equity incentive plans, including available shares, stock option activity, and stock-based compensation expense - The 2020 Stock Option and Grant Plan no longer grants awards, while the 2021 Stock Option and Incentive Plan had 7,188,823 shares available for future issuance as of June 30, 2023, with an automatic annual increase provision[56][57][58] - During the three and six months ended June 30, 2023, 9,594 restricted stock award shares were canceled and repurchased, and 65,222 shares were issued under the Employee Stock Purchase Plan (ESPP)[59][60] Stock Option Activity (Six Months Ended June 30, 2023) | Metric | Number of Options | Weighted-Average Exercise Price | | :-------------------------------------- | :---------------- | :------------------------------ | | Outstanding as of December 31, 2022 | 7,755,303 | $8.47 | | Options granted - 2021 Plan | 2,996,400 | $2.19 | | Options exercised | (55,047) | $0.32 | | Options cancelled | (1,691,166) | $7.77 | | Outstanding as of June 30, 2023 | 9,005,490 | $6.56 | Stock-Based Compensation Expense (in thousands) | Period | Total Stock-Based Compensation Expense | | :----------------------------------- | :------------------------------------- | | Three months ended June 30, 2023 | $2,845 | | Three months ended June 30, 2022 | $3,360 | | Six months ended June 30, 2023 | $6,108 | | Six months ended June 30, 2022 | $6,702 | 11. Restructuring Activities This note outlines the impact of the corporate restructuring, including workforce reductions, employee termination benefits, and asset impairment charges - The company eliminated approximately 71.2% of its workforce as part of the Restructuring Plan[66] - Charges for employee termination benefits totaled $3.3 million for the six months ended June 30, 2023, with a remaining liability of $404 thousand[69] - A retention program for key employees includes $4.0 million in cash bonuses, with $1.2 million recognized during the six months ended June 30, 2023[69] - An impairment charge of $1.1 million was recorded for lab equipment held for sale, with a remaining value of $1.6 million as of June 30, 2023[69] 12. Net Loss Per Share Attributable to Common Stockholders This note presents the net loss per share attributable to common stockholders and the weighted-average shares used in its computation Net Loss Per Share Attributable to Common Stockholders (Basic and Diluted) | Period | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss per share | $(0.97) | $(0.48) | $(1.40) | $(0.95) | | Weighted-average shares used | 56,745,347 | 54,572,866 | 56,499,160 | 54,284,836 | - Approximately 10.6 million anti-dilutive outstanding options, unvested shares, and ESPP shares were excluded from the computation of diluted net loss per common share for the six months ended June 30, 2023[72] 13. Income Taxes This note discusses the company's income tax position, including the recording of a full valuation allowance on deferred tax assets - A full valuation allowance was recorded on federal and state deferred tax assets, as management does not forecast the company to be in a taxable position in the near future[73] 14. Subsequent Events This note discloses significant events occurring after the reporting period, including asset sales and license agreements - On August 1, 2023, the company sold its non-genotoxic conditioning technology assets for upfront and contingent milestone payments up to $1.5 million, plus $0.6 million in R&D reimbursement and royalties[74] - On August 4, 2023, the company entered into a license and option agreement for its nula-cel program, granting a third party an option to acquire related IP and materials in exchange for a 20% equity interest in the counterparty[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, liquidity, capital resources, and critical accounting policies Overview This overview summarizes the company's business, recent strategic shifts, restructuring, and current financial position - The company, a clinical-stage gene editing company, paused its Phase 1/2 CEDAR study for nula-cel in January 2023 due to a serious adverse event and subsequently decided to discontinue its development and explore strategic alternatives[79] - A corporate restructuring in February 2023 led to a 71.2% workforce reduction and plans to sublease facilities; in August 2023, the company licensed its nula-cel program and sold its non-genotoxic conditioning program[79] - As of June 30, 2023, the company had $246.7 million in cash, cash equivalents, and marketable securities, and an accumulated deficit of $321.7 million, expecting these funds to last into Q4 2024 but anticipating substantial future losses and a need for additional capital[79][80] Stanford Exclusive License Agreement and Option Agreement This section details the exclusive license agreement with Stanford for gene editing technology, including financial obligations and development efforts - The company holds an exclusive worldwide license from Stanford for gene editing technology for SCD, XSCID, and beta thalassemia, involving an upfront fee, common stock issuance, and ongoing annual maintenance fees that increase over time[81] - The agreement includes obligations for milestone payments up to $12.8 million and low single-digit royalties on net sales of licensed products, along with a requirement to share a portion of sublicense income with Stanford[81][82] - The First Option Agreement with Stanford was extended, while the Second Option Agreement was terminated, and the company is required to use diligent efforts to develop and commercialize licensed products[82] LCGM Service Agreement This section describes the Master Manufacturing and Service Agreement with LCGM for nula-cel clinical manufacturing and related R&D expenses - The Master Manufacturing and Service Agreement with LCGM at Stanford covers clinical manufacturing, testing, and product release for nula-cel in the Phase 1/2 CEDAR clinical trial[83] LCGM Service Agreement Research and Development Expense (in thousands) | Period | R&D Expense | | :----------------------------------- | :---------- | | Six months ended June 30, 2023 | $1,100 | | Six months ended June 30, 2022 | $2,800 | - No additional expenses associated with the LCGM MSA are expected as of June 30, 2023[83] IDT License Agreement This section outlines the IDT License Agreement for HiFi Cas9 protein variants, including upfront payments, potential milestones, and royalties - The IDT License Agreement grants a non-exclusive license for HiFi Cas9 protein variants for human therapeutic applications in SCD, XSCID, and Gaucher disease, with an exclusive license to commercialize products in this field[84][86] - The agreement includes an upfront payment of $3.0 million, potential regulatory milestone payments up to $5.3 million (or $8.8 million if the field is expanded), and low single-digit royalties on net sales[86] - No research and development expense was recognized in connection with the IDT License Agreement during the six months ended June 30, 2023, and no milestones were probable[86] Initial Public Offering This section summarizes the company's initial public offering, including shares issued and net proceeds received - The company completed its initial public offering (IPO) in June and July 2021, issuing 16,100,000 shares of common stock at $17.00 per share[87] - The IPO generated net proceeds of approximately $251.3 million after deducting underwriting discounts, commissions, and offering costs[87] Components of Results of Operations This section outlines the primary categories of operating expenses, including R&D and G&A costs, and other income, providing context for financial performance Operating Expenses This sub-section details the nature of research and development and general and administrative expenses, explaining cost types and future trends Research and Development This section describes the components of research and development costs and factors influencing future R&D expenditures - Research and development costs primarily consist of external costs (CROs, CMOs, technology licenses, materials) and internal costs (employee-related, facilities), which are expensed as incurred[88] - Future R&D costs are highly variable and depend on factors such as the scope and progress of clinical trials, manufacturing activities, regulatory approvals, and the efficacy and safety profiles of product candidates[88][89] General and Administrative Expenses This section outlines the components of general and administrative expenses and expected future trends, particularly due to restructuring - General and administrative expenses primarily include employee-related costs for executive, business development, finance, accounting, and HR functions, as well as legal, accounting, consulting, insurance, and allocated facility costs[89] - The company expects to incur significant G&A expenses due to the restructuring plan, pursuit of strategic alternatives, and ongoing costs associated with operating as a public company[89] Other Income (Expense), Net This section explains that other income (expense), net, primarily consists of interest income from marketable securities - Other income (expense), net, primarily consists of interest income generated from investments in marketable securities[89] Results of Operations This section analyzes financial performance for the three and six months ended June 30, 2023 and 2022, detailing changes in operating expenses and other income Three Months Ended June 30, 2023 and 2022 This sub-section details financial performance for the three months ended June 30, 2023, versus 2022, highlighting changes in operating expenses and other income Operating Expenses This sub-section breaks down changes in R&D, G&A, and restructuring costs for the three months ended June 30, 2023, emphasizing restructuring impact Research and Development Expenses This section analyzes the decrease in research and development expenses for the three months ended June 30, 2023 - Research and development expenses decreased by $4.3 million (24.2%) to $13.5 million for the three months ended June 30, 2023, from $17.8 million in the prior year[92] - The decrease was primarily driven by a $2.6 million reduction in clinical trial and contract manufacturing activities and a $1.6 million decrease in personnel costs[92] General and Administrative Expenses This section analyzes the decrease in general and administrative expenses for the three months ended June 30, 2023 - General and administrative expenses decreased by $1.5 million (16.7%) to $7.5 million for the three months ended June 30, 2023, from $9.0 million in the prior year[93] - This decrease was mainly due to a $2.0 million reduction in consulting and personnel-related costs, partially offset by a $0.5 million increase in facility costs, lease expense, and depreciation[93] Restructuring and Impairment Costs This section details the significant restructuring and impairment costs incurred for the three months ended June 30, 2023 - Restructuring and impairment costs totaled $37.2 million for the three months ended June 30, 2023, compared to $0 in the prior year[95] - These costs included a $35.0 million non-cash impairment related to the Bayside Area Development lease, $1.1 million for impairment of assets held for sale, $0.8 million in severance expense, and $0.3 million for loss on disposal of property and equipment[95] Other Income (Expense), Net This section analyzes the increase in other income (expense), net, for the three months ended June 30, 2023 - Other income (expense), net, increased to $2.8 million for the three months ended June 30, 2023, from $0.8 million in the prior year, primarily due to higher interest income[95] Six Months Ended June 30, 2023 and 2022 This sub-section details financial performance for the six months ended June 30, 2023, versus 2022, highlighting changes in operating expenses and other income Operating Expenses This sub-section breaks down changes in R&D, G&A, and restructuring costs for the six months ended June 30, 2023, emphasizing restructuring impact Research and Development Expenses This section analyzes the decrease in research and development expenses for the six months ended June 30, 2023 - Research and development expenses decreased by $6.2 million (17.2%) to $29.8 million for the six months ended June 30, 2023, from $36.0 million in the prior year[97] - The decrease was primarily due to a $5.0 million reduction in clinical trial and contract manufacturing activities and a $1.4 million decrease in personnel costs[97] General and Administrative Expenses This section analyzes the decrease in general and administrative expenses for the six months ended June 30, 2023 - General and administrative expenses decreased by $1.6 million (9.6%) to $15.1 million for the six months ended June 30, 2023, from $16.7 million in the prior year[98] - This decrease was mainly due to a $2.6 million reduction in professional service fees, partially offset by a $0.6 million increase in facility costs and a $0.4 million increase in personnel-related costs[98] Restructuring and Impairment Costs This section details the significant restructuring and impairment costs incurred for the six months ended June 30, 2023 - Restructuring and impairment costs totaled $39.8 million for the six months ended June 30, 2023, compared to $0 in the prior year[99] - These costs included a $35.0 million non-cash impairment for the Bayside Area Development lease, $3.4 million in severance expense, $1.1 million for impairment of assets held for sale, and $0.2 million for loss on disposal of property and equipment[99] Other Income (Expense), Net This section analyzes the increase in other income (expense), net, for the six months ended June 30, 2023 - Other income (expense), net, increased to $5.4 million for the six months ended June 30, 2023, from $1.0 million in the prior year, primarily due to higher interest income[99] Liquidity and Capital Resources This section discusses the company's cash position, funding, future capital requirements, and cash flow activities, emphasizing the need for additional funding Future Funding Requirements This section outlines the company's expected future expenses and the need for substantial additional funding beyond current resources - The company expects to incur significant expenses for the foreseeable future related to advancing product candidates, expanding infrastructure, R&D, manufacturing, and public company operations[102] - Existing cash, cash equivalents, and marketable securities of $246.7 million as of June 30, 2023, are estimated to fund operating expenses and capital expenditure requirements into the fourth quarter of 2024[102] - Substantial additional funding will be required through public or private equity/debt financings, collaborations, or licensing arrangements, with future capital needs dependent on R&D progress, regulatory approvals, commercialization, and intellectual property costs[102][103] Cash Flows This section summarizes the company's cash flow activities, highlighting changes in operating and investing cash flows Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------------------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(34,729) | $(43,334) | | Net cash provided by (used in) investing activities | $115,389 | $(258,883) | | Net cash provided by financing activities | $116 | $412 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $80,776 | $(301,805) | - Net cash provided by investing activities significantly shifted from a use of $258.9 million in 2022 to a provision of $115.4 million in 2023, primarily due to $149.2 million from maturities of investments[105] Recently Adopted Accounting Pronouncements This section refers to Note 2 for information on recently adopted accounting standards - Information on new accounting standards is provided in Note 2 to the financial statements[106] Critical Accounting Policies and Significant Judgments and Estimates This section describes critical accounting policies and significant management judgments, particularly concerning leases and long-lived asset impairment Leases This section details the company's accounting policies for leases under ASC 842, including recognition and measurement of assets and liabilities - The company applies ASC 842 for leases, recognizing right-of-use assets and lease liabilities on the balance sheet, classifying leases as finance or operating based on specific criteria[108] - Right-of-use assets are initially measured at cost, and lease liabilities at the present value of lease payments, discounted using the implicit interest rate or the company's secured incremental borrowing rate[108] Impairment of Long-Lived Assets This section describes the company's policy for assessing impairment of long-lived assets, including the Bayside lease impairment - Impairment of long-lived assets is assessed when events indicate carrying amounts may not be fully recoverable, comparing carrying value to anticipated undiscounted net cash flows[109] - The Bayside lease was reviewed for impairment in April 2023 due to the restructuring plan, with an impairment charge recorded by reducing the net book value to its estimated fair value based on discounted estimated sublease cash flows[109] - Estimates for sublease income, including time to enter a sublease and rental rates, are highly judgmental and subject to significant uncertainty, potentially leading to additional impairment charges[109] Emerging Growth Company and Smaller Reporting Company Status This section outlines the company's status as an emerging growth and smaller reporting company, detailing associated reporting exemptions - The company is an emerging growth company (EGC) under the JOBS Act and has elected to use the extended transition period for new accounting standards, allowing for reduced reporting requirements[110] - EGC status provides exemptions such as presenting only two years of audited financial statements and exemption from auditor's report on internal controls, and will continue until specific criteria are met (e.g., $1.23 billion in revenue, December 31, 2026, or becoming a large accelerated filer)[110] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[112] Item 4. Controls and Procedures This section details management's evaluation of disclosure controls, changes in internal control, and acknowledges inherent limitations of control systems Evaluation of Disclosure Controls and Procedures This section describes management's evaluation of the effectiveness of disclosure controls and procedures as of June 30, 2023 - Management, with the CEO's participation, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023[113] - The CEO concluded that the disclosure controls and procedures were effective in providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[113] Changes in Internal Control Over Financial Reporting This section reports no material changes in internal control over financial reporting during the quarter ended June 30, 2023 - There were no changes in internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[114] Inherent Limitations on Effectiveness of Controls This section acknowledges that control systems provide only reasonable assurance due to inherent limitations and potential for circumvention - Management acknowledges that control systems provide only reasonable, not absolute, assurance due to inherent limitations such as faulty judgments, simple errors, and potential circumvention by individual acts, collusion, or management override[115] - The design of control systems is based on assumptions about future events, and there is no assurance that any design will succeed under all potential future conditions, as controls may become inadequate over time[115] PART II. OTHER INFORMATION This section provides additional information not covered in financial statements, including legal proceedings, risk factors, and equity securities details Item 1. Legal Proceedings The company is not currently party to any material legal proceedings, though it may become involved in the ordinary course of business - The company is not party to any material legal proceedings at this time[117] Item 1A. Risk Factors The company refers readers to risk factors in its Annual Report on Form 10-K for 2022, as no material changes have occurred - There are no material changes from the risk factors as previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[118] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details unregistered equity securities activities, including IPO proceeds usage and issuer purchases (a) Recent Sales of Unregistered Equity Securities This section confirms there were no recent sales of unregistered equity securities - There were no recent sales of unregistered equity securities[120] (b) Use of Proceeds from the Initial Public Offering of Common Stock This section details the use of proceeds from the company's initial public offering, including amounts used and current investments - The company completed its IPO in June and July 2021, receiving net proceeds of approximately $251.3 million[121] - As of June 30, 2023, approximately $166.8 million of the net IPO proceeds have been used, with funds invested in cash equivalents and other marketable securities[121] - There has been no material change in the planned use of proceeds from the IPO[121] (c) Issuer Purchases of Equity Securities This section summarizes the company's issuer purchases of equity securities, specifically unvested common stock from former employees Issuer Purchases of Equity Securities (Three Months Ended June 30, 2023) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--------------------------- | :------------------------------- | :--------------------------- | | April 1, 2023 - April 30, 2023 | 159,935 | $0.28 | | May 1, 2023 - May 31, 2023 | — | — | | June 1, 2023 - June 30, 2023 | 165,879 | $0.03 | | Total | 325,814 | $0.16 | - The repurchased shares were unvested common stock from former employees upon termination of employment, bought back at their original exercise prices[122] Item 3. Defaults Upon Senior Securities This section confirms there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[122] Item 4. Mine Safety Disclosures This section states that the item on mine safety disclosures is not applicable to the company - This item is not applicable to the company[122] Item 5. Other Information This section indicates that there is no other information to disclose under this item - There is no other information to disclose under this item[122] Item 6. Exhibits This section lists various exhibits filed with the Form 10-Q, including organizational documents, stock certificates, and certifications - Exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Specimen Common Stock Certificate, Amended and Restated Investors' Rights Agreement, and certifications required by the Securities Exchange Act of 1934[124] SIGNATURES This section contains the signatures for the report, confirming its submission by the authorized executive - The report was signed on August 14, 2023, by Josh Lehrer, M.D., President and Chief Executive Officer (Principal Executive Officer and Principal Accounting and Financial Officer) of GRAPHITE BIO, INC[126]