Design Therapeutics, Inc. 10-Q

Item 1. Financial Statements. DESIGN THERAPEUTICS, INC. CONDENSED BALANCE SHEETS (in thousands, except share and par value data) June 30, December 31, 2021 2020 (unaudited) Assets Current assets: Cash and cash equivalents $ 370,838 $ 2,379 Investment securities 31,998 33,712 Prepaid expense and other current assets (including related party amounts of $ 60 and $ 0 , respectively) 2,039 142 Total current assets 404,875 36,233 Property and equipment, net 271 71 Deferred offering costs — 212 Total assets $ 405,146 $ 36,516 Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit) Current liabilities: Accounts payable (including related party amounts of $ 20 and $ 20 , respectively) $ 1,585 $ 1,399 Accrued expenses 1,820 931 Total current liabilities 3,405 2,330 Other long-term liabilities 140 145 Total liabilities 3,545 2,475 Commitments and contingencies (See Note 8) Convertible preferred stock, $ 0.0001 par value; no shares and 22,500,000 shares authorized, no shares and 22,012,499 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively; liquidation preference of zero and $ 45,625 as of June 30, 2021 and December 31, 2020, respectively — 45,356 Stockholders’ equity (deficit): Common stock, $ 0.0001 par value; 200,000,000 and 60,000,000 shares authorized, 55,617,322 and 16,604,774 shares issued, 55,114,729 and 15,957,821 shares outstanding at June 30, 2021 and December 31, 2020, respectively 6 1 Additional paid-in capital 426,680 451 Accumulated deficit ( 25,073 ) ( 11,923 ) Accumulated other comprehensive income ( 12 ) 156 Total stockholders’ equity (deficit) 401,601 ( 11,315 ) Total liabilities, convertible preferred stock and stockholders’ equity (deficit) $ 405,146 $ 36,516 The accompanying notes are an integral part of these financial statements. 1 DESIGN THERAPEUTICS, INC. CONDENSED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Revenue: Grant revenue $ — $ 31 $ — $ 173 Operating expenses: Research and development (including related party amounts of $ 45 , $ 0 , $ 90 and $ 8 , respectively) 5,027 1,061 8,902 1,438 General and administrative (including related party amounts of $ 60 , $ 60 , $ 120 and $ 172 , respectively) 2,660 433 4,465 821 Total operating expenses 7,687 1,494 13,367 2,259 Loss from operations ( 7,687 ) ( 1,463 ) ( 13,367 ) ( 2,086 ) Other income (expense), net (including related party expense amounts of $ 0 , $ 0 , $ 0 , and $ 30 , respectively) 51 21 217 ( 19 ) Net loss $ ( 7,636 ) $ ( 1,442 ) $ ( 13,150 ) $ ( 2,105 ) Net loss per share, basic and diluted $ ( 0.14 ) $ ( 0.06 ) $ ( 0.36 ) $ ( 0.08 ) Weighted-average shares of common stock outstanding, basic and diluted 55,081,397 25,597,154 36,459,244 25,558,779 The accompanying notes are an integral part of these financial statements. 2 DESIGN THERAPEUTICS, INC. CONDENSED STATEMENTS OF COMPREHENSIVE LOSS (in thousands) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Net loss $ ( 7,636 ) $ ( 1,442 ) $ ( 13,150 ) $ ( 2,105 ) Other comprehensive gain (loss): Unrealized (loss) gain on available-for-sale securities ( 14 ) 13 ( 168 ) 194 Comprehensive loss $ ( 7,650 ) $ ( 1,429 ) $ ( 13,318 ) $ ( 1,911 ) The accompanying notes are an integral part of these financial statements. 3 DESIGN THERAPEUTICS, INC. CONDENSED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands, except share data) (Unaudited) Accumulated Total Convertible Additional Other Stockholders’ Preferred Stock Common Stock Paid-in Comprehensive Accumulated Equity Shares Amount Shares Amount Capital Income Deficit (Deficit) Balance at March 31, 2021 — $ — 55,042,550 $ 6 $ 425,435 $ 2 $ ( 17,437 ) $ 408,006 Vesting of restricted stock — — 72,179 — 2 — — 2 Stock-based compensation — — — — 1,243 — — 1,243 Unrealized loss on investments — — — — — ( 14 ) — ( 14 ) Net loss — — — — — — ( 7,636 ) ( 7,636 ) Balance at June 30, 2021 — $ — 55,114,729 $ 6 $ 426,680 $ ( 12 ) $ ( 25,073 ) $ 401,601 Balance at December 31, 2020 22,012,499 $ 45,356 15,957,821 $ 1 $ 451 $ 156 $ ( 11,923 ) $ ( 11,315 ) Issuance of Series B convertible preferred stock, net of $ 288 of issuance costs 19,083,979 124,712 — — — — — — Preferred stock converted into shares of common stock ( 41,096,478 ) ( 170,068 ) 25,212,548 4 170,064 — — 170,068 Initial public offering of common shares, net of $ 21,728 of issuance costs — — 13,800,000 1 254,270 — — 254,271 Vesting of restricted stock — — 144,360 — 5 — — 5 Stock-based compensation — — — — 1,890 — — 1,890 Unrealized loss on investments — — — — — ( 168 ) — ( 168 ) Net loss — — — — — — ( 13,150 ) ( 13,150 ) Balance at June 30, 2021 — $ — 55,114,729 $ 6 $ 426,680 $ ( 12 ) $ ( 25,073 ) $ 401,601 Balance at March 31, 2020 22,012,499 $ 45,356 15,690,585 $ 1 $ 4 $ 181 $ ( 4,306 ) $ ( 4,120 ) Vesting of restricted stock — — — — — — — Stock-based compensation — — — — 10 — — 10 Unrealized gain on investments — — — — — 13 — 13 Net loss — — — — — — ( 1,442 ) ( 1,442 ) Balance at June 30, 2020 22,012,499 $ 45,356 15,690,585 $ 1 $ 14 $ 194 $ ( 5,748 ) $ ( 5,539 ) Balance at December 31, 2019 — $ — 15,640,133 $ 1 $ — $ — $ ( 3,643 ) $ ( 3,642 ) Issuance of Series A convertible preferred stock, net of $ 270 of issuance costs 21,710,814 44,731 — — — — — — Conversion of convertible debt and interest to Series A convertible preferred stock 301,685 500 — — — — — — Settlement of bifurcated conversion liability — 125 — — — — — — Vesting of restricted stock — — 50,452 — — — — — Stock-based compensation — — — — 14 — — 14 Unrealized gain on investments — — — — — 194 — 194 Net loss — — — — — — ( 2,105 ) ( 2,105 ) Balance at June 30, 2020 22,012,499 $ 45,356 15,690,585 $ 1 $ 14 $ 194 $ ( 5,748 ) $ ( 5,539 ) The accompanying notes are an integral part of these financial statements. 4 DESIGN THERAPEUTICS, INC. CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended June 30, 2021 2020 Cash flows from operating activities Net loss $ ( 13,150 ) $ ( 2,105 ) Reconciliation of net loss to net cash used in operating activities: Depreciation 16 — Stock-based compensation 1,890 14 Amortization of premiums on investment securities, net ( 128 ) ( 11 ) Non-cash interest expense — 12 Non-cash interest expense—related party — 26 Change in operating assets and liabilities: Prepaid expense and other assets ( 1,624 ) ( 43 ) Prepaid expense and other assets—related party ( 60 ) — Deferred revenue — ( 173 ) Accounts payable and accrued liabilities 1,075 151 Accounts payable and accrued liabilities—related party — ( 1,837 ) Other long-term liabilities ( 5 ) — Net cash used in operating activities ( 11,986 ) ( 3,966 ) Cash flows from investing activities Purchases of investment securities ( 32,037 ) ( 42,757 ) Proceeds from maturities of investment securities 33,710 4,011 Purchases of property and equipment ( 216 ) — Net cash provided by (used in) investing activities 1,457 ( 38,746 ) Cash flows from financing activities Proceeds from initial public offering, net of issuance costs 254,271 — Proceeds from issuance of convertible preferred stock, net of issuance costs 124,712 44,731 Proceeds from the exercise of stock options and vesting of restricted stock 5 — Proceeds from the issuance of notes payable, net of issuance costs—related party — 200 Repayment of notes payable—related party — ( 400 ) Net cash provided by financing activities 378,988 44,531 Net increase in cash and cash equivalents 368,459 1,819 Cash and cash equivalents at beginning of period 2,379 77 Cash and cash equivalents at end of period $ 370,838 $ 1,896 Supplemental disclosures Conversion of convertible notes to convertible preferred shares, including bifurcated conversion liability $ — $ 271 Conversion of convertible notes to convertible preferred shares, including bifurcated conversion liability - related party $ — $ 354 Interest paid $ — $ 18 The accompanying notes are an integral part of these financial statements. 5 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Organization Design Therapeutics, Inc. (the “Company”) was incorporated in Delaware in December 2017 and is based in Carlsbad, California. The Company is a biopharmaceutical company pioneering a novel class of disease-modifying small-molecule therapeutics, called gene targeted chimeras (“GeneTACs”), that are designed to target the underlying cause of inherited nucleotide repeat expansion diseases. The Company’s lead product candidate is in Friedreich ataxia (“FA”), its second GeneTAC™ program is in myotonic dystrophy type-1 (“DM1”), and it is also advancing its GeneTAC portfolio to address other serious nucleotide repeat-driven monogenic diseases. The Company has experienced net losses and negative cash flows from operating activities since inception and expects to incur net losses for the foreseeable future as it advances its research and development programs, conducts clinical trials for any future product candidates and commercializes any such product candidates for which it receives regulatory approval. As the Company continues to incur losses, its transition to profitability will depend on the successful development, approval and commercialization of its future product candidates, and on the achievement of sufficient revenue to support its cost structure. The Company may never achieve profitability, and unless and until it does, it will need to continue to raise additional capital to fund its operations. 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Use of Estimates The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the reporting date and results of operations for the periods presented. The preparation of the Company’s financial statements requires it 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 Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to the recognition of grant revenue, accruals for research and development expenses and the valuation of equity-based awards. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. The full extent to which the novel coronavirus-2019 (“COVID-19”) pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. The Company has considered potential impacts arising from the COVID-19 pandemic and is not presently aware of any events or circumstances that would require the Company to update its estimates, judgments or revise the carrying value of its assets or liabilities. Stock Splits In February 2020, the Company effected a 5-for-1 forward stock split of its issued and outstanding common stock. Further, in March 2021, the Company effected a 1-for-1.63 reverse stock split of its issued and outstanding common stock. The par value and the authorized shares of the common stock were not adjusted as a result of these stock splits. The reverse stock split in March 2021 resulted in an adjustment to the convertible preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to the financial statements give retroactive effect to the stock splits for all periods presented. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities at the date of acquisition of three months or less to be cash equivalents. These investments may include money market accounts, money market funds, U.S. Government agency securities, corporate debt securities and commercial paper. The Company’s cash reserves are in a readily available checking account. 6 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) Investment Securities Investments in securities with maturities at the date of acquisition of more than three months are considered marketable securities. The Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. The Company has classified its investment holdings as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. Further, the Company classifies its available-for-sale investment securities, including those with maturities beyond one year, as current assets on its balance sheets based on the highly liquid nature of the securities and because these investments are considered available for use in current operations. The Company’s investment policy sets minimum credit quality criteria and maximum maturity limits on its investments to provide for safety of principle, liquidity and a reasonable rate of return. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Allowances for credit losses are reported on the balance sheet, if any. The cost of available-for-sale investment securities is adjusted for amortization of premiums and accretion of discounts until the securities mature . Such amortization and accretion is included in other income (expense) on the statements of operations. Realized gains and losses, if any, are also included in other income (expense) on the statement of operations and are derived using the specific identification method for determining the cost of the securities sold. During the periods presented, no realized gains or losses were recorded on the sale of investment securities and no impairments to reduce the value of any security was taken. See Note 5 for further discussion. Revenue Recognition The Company has generated revenue from grants awarded to it by the National Science Foundation (“NSF”), the National Institutes of Health (“NIH”) and the Friedreich’s Ataxia Research Alliance (“FARA”). These grants provide the Company with funding for certain research and development activities on a best-efforts basis and do not require scientific achievement as a performance obligation. The Company has determined that the entities funding these grant awards do not meet the definition of a “customer”, as defined by Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606) , and does not consider there to be a transfer of control of goods or services to the entities funding the grant. As such, the Company recognizes revenue from these awards in the period during which the related qualifying services are rendered and costs are incurred in accordance ASC 730, Research and Development . ASC 730 requires an assessment, at the inception of the grant, to determine whether the agreement is a liability or a contract to perform research and development services for others. Further, these grants are subject to the contribution’s guidance under ASC 958, Not-for-Profit Entities-Revenue Recognition , and as such, the Company determines whether it is obligated to repay the funds received to the grantor regardless of the outcome of the related research and development activities. If it determines there is such a liability, it estimates the obligation and recognize that liability. Alternatively, if the Company is not required to repay the funds, the grant agreement is accounted for as a contract to perform research and development services for others, in which case, the grant revenue is recorded as income in the statements of operations as the expenses are incurred. The Company’s current grant revenue is not deemed refundable, and therefore, no liability is recognized when income is recorded. Grant funding received prior to expenses being incurred are recorded as deferred revenue on the Company’s balance sheets. See Note 7 for further discussion. Research and Development Expenses Research and development expenses consist primarily of direct and indirect costs incurred in connection with its discovery efforts, and the preclinical and formulation development of its product candidates. In the future, the Company expects a substantial portion of its research and development expenses will relate to the clinical development of its product candidates. Direct costs include contracted research development and manufacturing, consulting fees, license fees, laboratory supplies and other expenses incurred to sustain research and development programs. Indirect costs include personnel-related expenses, consisting of employee salaries, related benefits, and stock-based compensation expense for employees engaged in research and development activities, facilities related expenses, and other indirect expenses. A significant portion of the Company’s research and development expenses have been direct costs, which the Company tracks by stage of development, preclinical or clinical. However, the Company does not track its internal research and development expenses on a program specific basis, unless specific to research grants, because these costs are deployed across multiple projects and, as such, are not separately classified. Research and development expenses are charged to operating expenses as incurred when these expenditures relate to the Company’s research and development efforts and have no alternative future uses. 7 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) The Company has entered into various contracts with research and development organizations, vendors and consultants. Payments for these activities are based on the terms of the individual agreements, which may differ from the of periods over which materials or services are provided. Payments made in advance of performance are reflected in the accompanying balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. The Company determines accrual estimates through review of the underlying contracts along with discussions with research and other key personnel as to the progress of the research and development activities, invoices received and contracted costs. During the course of a study or trial, the Company adjusts its rate of expense recognition if actual results differ from its estimates. 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. Stock-Based Compensation Stock options issued pursuant to the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) and 2018 Equity Incentive Plan (the “2018 Plan”) and option features associated with the rights to purchase shares pursuant to the Company’s 2021 Employee Stock Purchase Plan (the “ESPP”) are valued using the Black-Scholes option pricing model on the date of grant or subscription period. This option pricing model involves a number of estimates, including the expected lives of the stock options or subscription period , the Company’s anticipated stock volatility and interest rates. The Company recognizes the expense for equity awards on a straight-line basis over the requisite service periods of the awards or the number of shares estimated to be issued pursuant to the ESPP . Forfeitures are recognized as they occur. Stock-based compensation expense recognized in the Company’s statements of operations during the three and six months ended June 30, 2021 and 2020, were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 496 $ 7 $ 660 $ 10 General and administrative 747 3 1,230 4 Total $ 1,243 $ 10 $ 1,890 $ 14 Recent Accounting Pronouncements In May 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) . ASU 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU provides guidance to clarify whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. ASU 2021-04 is effective for annual beginning after December 15, 2021, inclding interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that this new guidance will have on its condensed consolidated financial statements and does not currently expect the adoption will have a material impact on its financial statements and related disclosures. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity . The guidance, among other items, clarifies that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. The ASU’s amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for periods beginning after December 15, 2020. The Company has not yet adopted this guidance and does not currently expect the adoption will have a material impact on its financial statements and related disclosures. 3. 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, without consideration for potentially dilutive securities. 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 8 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of convertible preferred stock, restricted common stock subject to repurchase, stock options outstanding under the Company’s equity incentive plan s , employee stock purchase rights under the Company’s ESPP, and shares of common stock that are issuable under convertible debt , as applicable . 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 antidilutive. More specifically, as of June 30, 2021and 2020, convertible preferred stock, stock options, employee stock purchase rights, and unvested common stock subject to repurchase, as applicable, totaling approximately 2,687,000 shares and 14,431,000 shares, respectively, were excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive. 4. Fair Value Measurements Accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1: Observable inputs such as quoted prices in active markets. Level 2: Inputs, other than the quoted prices in active markets that are observable either directly or indirectly. Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The carrying value of the Company’s cash, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to the short-term nature of those instruments. The Company’s investment securities, which may include money market accounts, money market funds, certificates of deposits, U.S. Treasury securities, and high quality, marketable debt instruments of corporations and government sponsored enterprises, are measured at fair value in accordance with the fair value hierarchy. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis and no transfers between levels have occurred during the periods presented. The following table summarize the Company’s financial instruments measured at fair value on a recurring basis at June 30, 2021 and December 31, 2020 (in thousands): Fair Value Measurement at End of Period Using: Quoted Prices In Active Markets Significant For Other Significant Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) As of June 30, 2021: Assets: Money market funds ( 1) $ 369,796 $ 369,796 $ — $ — Certificates of deposit 1,919 1,919 — — U.S. Treasury securities 30,079 30,079 — — Total $ 401,794 $ 401,794 $ — $ — As of December 31, 2020: Assets: Money market funds ( 1) $ 2,100 $ 2,100 $ — $ — Certificates of deposit 1,754 1,754 — — U.S. Treasury securities 31,958 31,958 — — Total $ 35,812 $ 35,812 $ — $ — (1) Included in cash and cash equivalents on the accompanying balance sheets. 9 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) Interest bearing money market accounts and certificates of deposit are valued at amortized cost, which approximates fair value. 5. Investment Securities The Company’s investment policy defines allowable investment securities and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. In accordance with the Company’s investment policy, it has invested funds in marketable securities. The cost, gross unrealized holding gains, gross unrealized holding losses, allowances for credit losses and fair value of available-for-sale investments by types, maturies and classes of securities at June 30, 2021 and December 31, 2020 consisted of the following (in thousands): As of June 30, 2021 Estimated Allowance Fair Amortized Unrealized Unrealized for Credit Market Maturity Cost Gains Losses Losses Value Certificates of deposits Within 1 year $ 1,470 $ 1 $ ( 1 ) $ — $ 1,470 Certificates of deposits 1 year to 2 years 449 — — — 449 U.S. Treasury securities 1 year to 2 years 30,091 — ( 12 ) — 30,079 Total $ 32,010 $ 1 $ ( 13 ) $ — $ 31,998 As of December 31, 2020 Estimated Allowance Fair Amortized Unrealized Unrealized for Credit Market Maturity Cost Gains Losses Losses Value Certificates of deposits Within 1 year $ 1,750 $ 4 $ — $ — $ 1,754 U.S. Treasury securities Within 1 year 31,806 152 — — 31,958 Total $ 33,556 $ 156 $ — $ — $ 33,712 The Company reviews its investments at each reporting date to identify and evaluate whether a decline in fair value below the amortized cost basis of available-for-sale securities is due to credit-related factors and determines if such unrealized losses are the result of credit losses that requires impairment. Factors considered in determining whether an unrealized loss is the result of a credit loss or other factors include the extent to which the fair value is less than the cost basis, any changes to the rating of the security by a rating agency, the financial condition and near-term prospects of the issuer, any historical failure of the issuer to make scheduled interest or principal payments, any adverse legal or regulatory events affecting the issuer or issuer’s industry, any significant deterioration in economic condition and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. At June 30, 2021 there were eight securities in an unrealized loss position. The Company evaluated the securities individually for other-than-temporary impairment and considered the decline in market value to be primarily attributable to changes in interest rates. Each security remained at a high credit quality rating and the unrealized losses of each security was immaterial. Further, there had been no adverse conditions noted for any of the issuers and Company does not intend to sell any of the securities prior to maturity. As such, the Company has classified the losses as temporary in nature and the Company did not record a reserve for credit losses. At December 31, 2020, there were no securities in an unrealized loss position. As of June 30, 2021, the Company held eight domestic certificates of deposit with amortized costs below the Federal Deposit Insurance Corporation (“FDIC”) insured limit. Accrued interest receivable on available-for-sale investment securities, included in prepaids and other current assets on the Company’s balance sheets, was less than $ 0.1 million at June 30, 2021 and December 31, 2020. 10 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) 6. Balance Sheet Details Prepaid expenses and other current assets consisted of the following (in thousands): June 30, 2021 December 31, 2020 Prepaid expenses $ 1,859 $ 60 Security deposits 104 47 Interest receivable 76 10 Other — 25 Total $ 2,039 $ 142 Property and equipment consisted of the following (in thousands): June 30, 2021 December 31, 2020 Laboratory equipment $ 281 $ 76 Computer equipment and software 11 — 292 76 Less accumulated depreciation ( 21 ) ( 5 ) Total $ 271 $ 71 Accrued liabilities consisted of the following (in thousands): June 30, 2021 December 31, 2020 Accrued personnel costs $ 941 $ 565 Accrued research and development costs 640 266 Accrued other 239 100 Total $ 1,820 $ 931 7. Grant Revenue The Company recognizes revenue pursuant to grants, as described further in Note 2, by measuring the progress of the applicable research and development services provided over time, based on the effort the Company expends and costs incurred, relative to the estimated total effort and costs to be incurred under the grant. This results in a percentage that the Company multiplies by the grant award amount to determine the amount of grant revenue to be recognized each period. This approach requires the Company to use judgement and make estimates of future expenditures. If the Company’s estimates or judgements change over the course of the term of the grant, it may affect the timing and amount of revenue that it recognizes in the current and future periods. During the three and six months ended June 30, 2020, the Company recognized less than $ 0.1 million and $ 0.2 million of grant revenue, respectively, from awards by the NSF, NIH and FARA, respectively. No grant revenue was recognized for the three and six months ended June 30, 2021. 8. Commitments and Contingencies Notes Payable-Related Party In January 2019, the Company issued an unsecured promissory note to borrow up to $ 0.5 million to a co-founder (the “January Note”) for working capital. The January Note bore interest at prime plus 4.5 %, was scheduled to mature on or before January 30, 2021 and included a final payment of 3 % on the amounts advanced at maturity. In February and March 2019, the Company borrowed an aggregate of $ 0.2 million under the January Note with interest payable at 10 % per annum. The Company recorded an immaterial amount of debt issuance costs associated with the January Note. The debt issuance costs and final payment for the advances were amortized to interest expense using the effective interest rate method over the loan term. The principal and interest payable on the January Note were repaid in full in 2020. 11 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) In November 2019, the Company issued an unsecured promissory note to borrow up to $ 0.5 million to a co-founder (the “November Note”) for working capital. The November Note bore interest at prime plus 4.5 % and matured on or before January 1, 2022 and included a final payment of 3 % on the amounts advanced at maturity. In December 2019 and January 2020, the Company borrowed a total of $ 0.4 million under the November Note with interest payable at 9.25 % per annum. The final payment on the advances was amortized to interest expense using the effective interest rate method over the loan term. The principal and interest payable on the November Note were repaid in full in 2020. Convertible Notes In May and July 2018, the Company issued $ 0.3 million of convertible notes to a co-founder for cash with a maturity date on or after February 5, 2021, if not converted earlier . In February 2019, the Company issued an additional $ 0.2 million of convertible notes to consultants for services rendered with a maturity date on or after May 16, 2020, if not converted earlier . The convertible notes bore interest of 8 % per annum and were convertible into equity securities sold at the next financing at 80 % of the selling price per share of such equity financing. The conversion features of the convertible notes were recorded as a discount to the notes payable at issuance and amortized as interest expense over the loan term using the effective interest rate method. In February 2020, the outstanding principal and accrued interest of the convertible notes totaling $ 0.5 million were converted into 301,685 shares of the Company’s Series A convertible preferred stock at $ 1.65816 per share. See Note 10 for further discussion. Lease In May 2019 the Company entered into an agreement, as subsequently amended, to lease laboratory space pursuant to a three-month, automatically renewing lease. The lease is subject to annual rent increases of 3 % and the Company had paid security deposits totaling $ 0.1 million as of June 30, 2021 which was included in prepaid expenses and other current assets on the Company’s balance sheets. Due to the short-term nature of the lease, it has not been included as an operating lease right of use asset nor as an operating lease liability on the Company’s balance sheets. The Company also has access to office space on an as-available basis from time to time pursuant to a consulting agreement. See Note 11 for further discussion. In February 2021, the Company entered into a lease agreement with Crossing Holdings, LLC to rent approximately 12,370 square feet of laboratory and office space (the “Lease”). The Company’s Executive Chairperson, co-founder and member of its board of directors, is the sole member and Manager of Crossing Holdings, LLC. The anticipated delivery date of the space is September 1, 2021 and the lease is expected to commence at that time. The term of the lease is 72 months after commencement with an option to extend the lease term for a period of three years . Lease payments are subject to annual increases of 3 % and the Company is responsible for its share of operating expenses and taxes. Future minimum payments under the Lease as of June 30, 2021 are as follows (in thousands): 2021 $ 242 2022 733 2023 755 2024 778 2025 801 Thereafter 1,387 $ 4,696 Rent expense for the three months ended June 30, 2021 and 2020 was $ 136,000 and $ 22,000 , respectively. Rent expense for the six months ended June 30, 2021 and 2020 was $ 212,000 and $ 34,000 , respectively. Contingencies From time to time, the Company may become subject to claims or suits arising in the ordinary course of business. The Company accrues a liability for such matters when it is probable that the future expenditures will be made and such expenditures can be reasonably estimated. The Company had no such contingent liabilities as of June 30, 2021 or December 31, 2020. 12 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) 9. License Agreement In February 2019, the Company entered into a Human Therapeutics Exclusive License Agreement (the “License Agreement”) with the Wisconsin Alumni Research Foundation (“WARF”). Under the License Agreement, the Company licensed the exclusive, worldwide, royalty-bearing, sublicensable, rights to certain WARF patents and the nonexclusive worldwide rights to certain know-how to develop and commercialize products for the prevention, diagnosis and treatment of disease. As consideration for the license, the Company agreed to pay an upfront fee of $ 250,000 , which the Company immediately expensed as research and development expense in its statements of operations as there was no alternative future use for the license. The Company paid $ 25,000 of the upfront fee upon execution of the agreement and the remaining $ 225,000 was due upon the earlier of the first anniversary of the License Agreement or the Company receiving a certain level of gross proceeds from an equity financing. At December 31, 2019, the second payment of $ 225,000 was recorded as an accrued liability on the Company’s balance sheet. In February 2020, the Company paid the $ 225,000 balance upon the initial closing of its Series A preferred stock financing. Pursuant to the License Agreement, the Company is required to pay $ 125,000 upon the acceptance of an investigation new drug (“IND”) application in the U.S. and will be required to make further aggregate milestone payments of up to $ 17.5 million upon achievement of certain other regulatory and commercial milestones. The Company may also be required to pay royalties based on annual net product sales in the low single digits on its or its sublicensees’ net product sales on a country-by-country and product-by-product basis, and is subject to a minimum royalty of $ 0.1 million per calendar year upon first commercial product sale. Further, the Company may be required to pay sublicense fees in the mid-single digits percentage for fees, royalties or other payments earned from the granting of sublicenses to the WARF patents and know-how. The Company has paid no milestone or royalty payments as of June 30, 2021. The Company is responsible for reimbursing WARF for costs incurred in connection with prosecuting and maintaining patent rights that are specific to the License Agreement. Expenses recognized in connection with legal patent fees under this License Agreement were less than $ 0.1 million for the three and six months ended June 30, 2021 and 2020, respectively, which were recorded as general and administrative expenses in the statements of operations. The Company may terminate the License Agreement with 90 days written notice or for certain breaches of the agreement. WARF may terminate the License Agreement with 90 days written notice if first commercial sale does not occur before December 31, 2031. Unless terminated earlier by the parties, the term of the License Agreement will continue until the last licensed patent expires in all countries. 10. Convertible Preferred Stock and Stockholders’ Deficit Authorized Shares In connection with the completion of the Company’s initial public offering (“IPO”) in March 2021, the Company amended its Certificate of Incorporation to authorize 200,000,000 shares of common stock, par value $ 0.0001 per share, and 10,000,000 shares of preferred stock, par value $ 0.0001 per share, respectively. Public Offering and Related Transaction In March 2021, the Company completed its IPO selling 13,800,000 shares its common stock at $ 20.00 per share. Proceeds from the Company’s IPO, net of underwriting discounts and commissions and other offering costs, were $ 254.3 million. In connection with the IPO, all 41,096,478 shares of convertible preferred stock outstanding at the time of the IPO converted into 25,212,548 shares of the Company’s common stock. Convertible Preferred Stock In February and March 2020, the Company issued 21,710,814 shares of Series A convertible preferred stock at $ 2.0727 per share for net cash proceeds of $ 44.7 million (the “Series A Financing”). In connection with the Series A Financing, the Company issued an additional 301,685 shares of its Series A convertible preferred stock at $ 1.65816 per share in February 2020 upon the conversion and extinguishment of its convertible notes, as discussed further in Note 8. In January 2021, the Company issued 19,083,979 shares of Series B convertible preferred stock at $ 6.55 per share for net cash proceeds of approximately $ 124.7 million. 13 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) All shares of convertible preferred stock outstanding at the Company’s IPO were converted into shares of the Company’s common stock. Equity Incentive Award Plans In March 2021, the Company’s board of directors and stockholders adopted the 2021 Plan, which became effective on March 25, 2021, the date of the underwriting agreement related to the Company’s IPO. Upon adoption of the 2021 Plan, the Company restricted future grants from its 2018 Plan. Under the 2021 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants, including employees and consultants of the Company’s affiliates. A total of 6,118,648 new shares of common stock were approved to be initially reserved for issuance under the 2021 Plan. The number of shares reserved under the 2021 Plan also include 881,352 shares of common stock that remained available for issuance under the 2018 Plan at the time the 2021 Plan became effective, and will be increased by the number of shares under the 2018 Plan that are repurchased, forfeited, expired or cancelled on or after the effective date of the 2021 Plan. In addition, the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2022 through January 1, 2031, in an amount equal to 5% of the total number of shares of the Company’s common stock on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Company’s board of directors. Shares subject to Repurchase Pursuant to the 2018 Plan, the Company has issued shares of restricted common stock to employees, consultants and members of its board of directors. Additionally, certain stock options granted pursuant to the 2018 Plan provide for the right to elect to exercise unvested options early in exchange for restricted shares of common stock. These restricted shares of common stock generally vest over a four-year period and are subject to repurchase by the Company at the original purchase price or, in certain instances the fair market value if such fair market value is lower than the purchase price, in the event the recipient’s service is terminated either voluntarily or involuntarily prior to vesting. A summary of the Company’s restricted shares of common stock and unvested stock liability, recorded as a long-term liability on the Company’s balance sheets, is as follows (in thousands, except share data): Shares Liability Balance at December 31, 2020 646,953 $ 145 Vested shares ( 144,360 ) ( 5 ) Balance at June 30, 2021 502,593 $ 140 2021 Employee Stock Purchase Plan In March 2021, the Company’s board of directors and stockholders adopted the 2021 Employee Stock Purchase Plan (the “ESPP”), which became effective on March 25, 2021, the date of the underwriting agreement related to the Company’s IPO. The ESPP permits eligible employees who elect to participate in an offering under the ESPP to have up to 15 % of their eligible earnings withheld, subject to certain limitations, to purchase shares of common stock pursuant to the ESPP. The price of common stock purchased under the ESPP is equal to 85 % of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant date of purchase. A total of 600,000 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, 14 DESIGN THERAPEUTICS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued) the number of shares of common stock available for issuance under the ESPP will automatically increase on January 1 of each calendar year, starting on January 1, 2022 through January 1, 2031, in an amount equal to the lesser of (i) 1% of the total number of shares of the Company’s common stock on the last day of the calendar month before the date of each automatic increase and (ii) 1,200,000 shares; provided that before the date of any such increase, the Company’s board of directors may determine that such increase will be less than the amount set forth in clauses (i) and (ii). As of June 30, 2021 , no shares of the Company’s common stock have been purchased under the ESPP. 11. Related Party Transactions Consulting Agreements In January 2019, the Company entered into an agreement with the Marlinspike Group, LLC (“Marlinspike Group”) for research support, management, and business consulting services (the “2019 Consulting Agreement”). Further, Marlinspike Group provides the use of approximately 2,120 square feet of its office space in Carlsbad, California to the Company on an as-available basis from time to time pursuant to the agreement. The Company’s Executive Chairperson, co-founder and member of its board of directors is an executive officer of Marlinspike Group and, the Company’s Chief Operating Officer was an executive officer of Marlinspike Group until February 2020. The term of the 2019 Consulting Agreement was for a one-year period, subject to automatic one-month renewals unless terminated upon 14 days’ written notice. In March 2020, the Consulting Agreement was terminated and replaced with an amended consulting agreement (the “2020 Consulting Agreement”), which provides for the similar services and use of office space for a monthly fee of $ 20,000 . Pursuant to the terms of the 2020 Consulting Agreement, it shall remain in effect until otherwise terminated. Termination may occur at any time upon mutual agreement or unilaterally upon 30 days’ written notice. If the Company unilaterally terminates the 2020 Consulting Agreement for any reason other than cause, it would be subject to a $ 240,000 termination fee. The Company cannot determine when, or if, such a termination will occur and hence has not recorded a liability for the fee. Expenses recognized by the Company under the 2020 Consulting Agreement during the periods presented were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ — $ — $ — $ 8 General and administrative 60 60 120 172 Total expenses $ 60 $ 60 $ 120 $ 180 In December 2017, the Company entered into a consulting agreement with Aseem Z. Ansari, Ph.D. Dr. Asnsari, a co-founder, provides consulting services and advises on certain research and development activities (the “Research Consulting Agreement”). Pursuant to the Research Consulting Agreement, as amended, Dr. Ansari performs these services for a monthly fee of $ 15,000 . Expenses recognized by the Company under the Research Consulting Agreement during the periods presented were as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 Research and development $ 45 $ — $ 90 $ — Total expenses $ 45 $ — $ 90 $ — As of June 30, 2021 and December 31, 2020, the Company had accounts payable of $ 20,000 pursuant to its related party consulting agreements. Convertible Notes and Notes Payable In May and July 2018, the Company issued a total of $ 0.3 million of convertible notes to a co-founder for cash with a maturity date on or after February 5, 2021, if not converted earlier . The notes bore interest of 8 % per annum and were convertible into equity securities sold at the next financing at 80 % of the selling price per share of such equity financing. In February 2020, these notes converted into 171,025 shares of the Company’s convertible preferred stock pursuant to the closing of the Series A preferred stock financing. Further, the Company has issued unsecured promissory notes to this co-founder for working capital. See Note 8 for further discussion. 15