LENZ Therapeutics, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s discussion and analysis of financial condition and results of operations, referred to as the “Financial Review,” is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position of Graphite Bio ( the “Company,” “Graphite,” “we,” “our,” or “us” and other similar pronouns). This discussion and analysis should be read in conjunction with the financial statements and accompanying financial notes in Item 8 of Part II of this Annual Report on Form 10-K. Certain statements in this report constitute forward-looking statements. See Cautionary Note Regarding Forward-Looking Statements of this Annual Report on Form 10-K for additional factors relating to these statements and Item 1A - Risk Factors in Part I of this Annual Report on Form 10-K for a list of certain risk factors applicable to our business, financial condition, and results of operations. Overview We are a clinical-stage, next-generation gene editing company harnessing high-efficiency targeted gene integration to develop a new class of therapies to potentially cure a wide range of serious and life-threatening diseases. We are pioneering a precision gene editing approach to achieve one of medicine’s most elusive goals: to precisely “find & replace” any gene in the genome. Our next-generation gene editing platform allows us to precisely correct mutations, replace entire disease-causing genes with normal genes, or insert new genes into predetermined, safe locations. We believe our approach could enable broad applications to transform human health, including directly correcting mutations, engineering cells to permanently deliver therapeutic proteins, and precisely engineering effector cells to treat or cure a wide range of serious genetic and other diseases, including cancer, autoimmune and neurodegenerative diseases. Our lead product candidate GPH101 is a highly differentiated approach with the potential to directly correct the mutation that causes SCD and restore normal HgbA expression. Curing sickle cell disease by correcting the disease-causing point mutation to normal is viewed as the gold-standard for curing SCD and has been the dream of treating physicians for generations. In November 2021, we enrolled the first patient in a Phase 1/2 clinical trial of GPH101. We intend to dose our first patient in the second half of 2022, with initial proof-of-concept data anticipated in 2023. We are also advancing our research programs and pipeline of potential one-time curative therapies for a wide range of genetic and other serious diseases and intend to file an IND for a second program by mid-2024. We were incorporated in Ontario, Canada in June 2017 as Longbow Therapeutics Inc. and were reincorporated in the State of Delaware in October 2019. In February 2020, we changed our name to Integral Medicines, Inc. and in August 2020, we changed our name to Graphite Bio, Inc. Research and development of our initial technology ceased at the end of 2018 and we did not have any significant operations or any research and development activities in 2019. In March 2020, we identified new gene editing technology which we sought to further develop, and we licensed the related intellectual property rights from The Board of Trustees of the Leland Stanford Junior University (“Stanford”) in December 2020. Since our inception in June 2017, we have devoted substantially all of our resources to performing research and development, enabling manufacturing activities in support of our product development efforts, hiring personnel, acquiring and developing our technology and product candidates, organizing and staffing our Company, performing business planning, establishing our intellectual property portfolio, raising capital and providing general and administrative support for these activities. We have one product candidate that has an accepted IND. All of our other product candidates are in preclinical development, and we do not have any products approved for sale and have not generated any revenue from product sales. To date, we have funded our operations primarily with an aggregate of $197.7 million in aggregate gross proceeds from the sales of our redeemable convertible preferred stock and the issuance of convertible notes. In June and July 2021, we completed our initial public offering (“IPO”) and issued 16,100,000 shares of our common stock for $17.00 a share with a total net proceeds of approximately $251.3 million, and total underwriting costs of $19.1 million and issuance costs of $3.2 million. We will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through public or private equity or debt financings, and collaborations, strategic alliances and licensing arrangements with third parties. We have incurred significant operating losses since inception. As of December 31, 2021, we had cash, cash equivalents and restricted cash of $378.7 million and an accumulated deficit of $141.4 million. We expect to continue to incur substantial losses for the foreseeable future, and our transition to profitability will depend upon successful development, approval and commercialization of our product candidates and upon achievement of sufficient revenues to support our cost structure. We do not expect to generate any revenue from commercial product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take at least several years. We may never achieve profitability, and unless and until then, we will need to continue to raise additional capital. Based upon our current operating plan, we estimate that our cash, cash equivalents and restricted cash as of December 31, 2021 will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months. 98 We expect our expenses will increase substantially in connection with our ongoing and planned activities, as we: • advance product candidates through preclinical studies and clinical trials; • manufacture supplies for our preclinical studies and clinical trials; • acquire, discover, validate and develop additional product candidates and technologies; • attract, hire and retain additional personnel; • operate as a public company; • implement operational, financial and management systems; • pursue regulatory approval for any product candidates that successfully complete clinical trials; • expand or establish additional facilities for our growing business and operations; • establish a sales, marketing and distribution infrastructure to commercialize any product candidate for which we may obtain marketing approval and related commercial manufacturing build-out; and • obtain, maintain, expand and protect our portfolio of intellectual property rights . We rely and will continue to rely on third parties in the conduct of our preclinical studies and clinical trials and for manufacturing and supply of our product candidates. We have no internal manufacturing capabilities, and we may continue to rely on third parties for our preclinical and clinical trial materials, of which the main suppliers are single-source suppliers. Given our stage of development, we do not yet have a marketing or sales organization or commercial infrastructure. Accordingly, if we obtain regulatory approval for any of our product candidates, we also expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate revenue from sales of any product for which we receive regulatory approval, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, we may be unable to continue our operations at planned levels and may be forced to reduce our operations. Business Impact of COVID-19 Pandemic In March 2020, the World Health Organization declared the global COVID-19 outbreak a pandemic. The ongoing COVID-19 pandemic may continue to affect our ability to initiate and complete preclinical studies, delay the initiation of our planned clinical trials or future clinical trials or the progress or completion of our ongoing clinical trials, impede regulatory activities, disrupt the supply chain and the manufacture or shipment of drug substances and finished drug products for our product candidates for use in our clinical trials, impair testing, monitoring, data collection and analysis and other related activities or have other adverse effects on our business, financial condition, results of operations and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could result in adverse effects on our business and operations and our ability to raise additional funds to support our operations. The trading prices for biopharmaceutical companies have been highly volatile as a result of the COVID-19 pandemic, and we may face similar volatility in our stock price. We are following, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention as well as federal, state, and local governments regarding working-from-home practices for non-essential employees as well as return-to-work policies and procedures. We expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic. The recent surge of the COVID-19 Omicron variant, which began around the same time that our Phase 1/2 clinical trial of GPH101 initially opened for enrollment, has impacted trial enrollment and site operations, including resourcing and staffing, resulting in a delay in timelines to anticipated data. In particular, the treatment of the first patient in our Phase 1/2 clinical trial was delayed due to a prospective participant becoming infected with COVID-19. We cannot at this time predict the specific extent, duration, or full impact that the COVID-19 pandemic will have on our business, financial condition and operations, including planned clinical trials and clinical development timelines. The impact of the COVID-19 pandemic on our financial performance will depend on future developments, including the duration and spread of the pandemic, its impact on our clinical trial enrollment, trial sites, CROs, CMOs and other third parties with whom we do business, its impact on regulatory authorities and our key scientific and management personnel, progress of vaccination and related governmental advisories and restrictions. These developments and the impact of the COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets or the overall economy are impacted for an extended period, our business may be materially adversely affected. Stanford Exclusive License Agreement and Option Agreement In December 2020, we entered into an exclusive license agreement (the “License Agreement”), with The Board of Trustees of the Leland Stanford Junior University (Stanford), pursuant to which Stanford granted us a worldwide license to specified technology and 99 patent rights to develop, manufacture and commercialize human prophylactic and therapeutic products. Other than with respect to specified, broadly applicable assays and procedures and subject to retained rights by Stanford, the license is exclusive with respect to human prophylactic and therapeutic products for the treatment of SCD, XSCID and beta thalassemia. The license is non-exclusive with respect to those broadly applicable assays and procedures and with respect to all human prophylactic and therapeutic products other than for the treatment of SCD, XSCID and beta thalassemia. To date, pursuant to the License Agreement, we have paid an upfront license fee to Stanford of $50.0 thousand and issued to Stanford and its designees an aggregate of approximately 0.6 million shares of our common stock. The acquisition of the exclusive license, including patent rights and know-how, and clinical supplies was accounted for as an asset acquisition and as the acquired technology and inventories did not have an alternative use, the total consideration of $2.8 million was recorded as research and development expense in the statements of operations and comprehensive loss for the year ended December 31, 2020. We are obligated to pay Stanford an annual license maintenance fee on each anniversary of the effective date of the License Agreement. The annual license maintenance fee initially is $5.0 thousand and will increase to $50.0 thousand in three increments over the first seven anniversaries of the effective date of the License Agreement. After the first commercial sale of a product falling within the scope of the license (the “Licensed Product”), the annual license maintenance fee is $200.0 thousand. In May 2021, we issued 640,861 shares of our common stock in connection with the License Agreement. Subsequently, in June 2021, related to the License Agreement, we repurchased 624,845 shares of our common stock from investors and founders. We are required to share with Stanford a portion of any non-royalty income we receive from sublicensing the licensed patent rights or technology, subject to specified exclusions. With respect to sublicenses granted to products for the treatment of SCD, XSCID and beta thalassemia, the portion of sublicense income we must share with Stanford varies by indication and declines from between a mid-teen to a second quartile double-digit percentage prior to the filing of an IND to between a high single-digit to very low double-digit percentage upon achievement of a specified clinical milestone. With respect to sublicenses granted under the licensed technology rights and not licensed patent rights, the portion of sublicense income shared with Stanford declines from between a mid-single-digit and very low double-digit percentage prior to the filing of an IND to a low single-digit percentage after filing of an IND. We are obligated to make payments to Stanford with respect to each Licensed Product of up to an aggregate of $12.8 million upon the achievement of certain development, regulatory and commercial milestones. Such amounts are payable only once upon the first occurrence of a particular milestone event with respect to each Licensed Product and only once with respect to each new indication covered by any of the Licensed Products. We also are obligated to pay Stanford low single-digit royalties based on worldwide annual net sales of any Licensed Product, subject to specified reductions. We will be obligated to continue to pay royalties on a Licensed Product-by-Licensed Product and country-by-country basis, until the latest of (i) the expiration of the last valid claim under the licensed patents that covers the sale or manufacture of such Licensed Product in such country, (ii) the expiration of any period of regulatory exclusivity with respect to such Licensed Product in such country or (iii) the expiration of ten years after the first commercial sale of such Licensed Product in such country. The term of the License Agreement expires on the later of (i) the expiration of the last patent or abandonment of the last patent application within the license patent rights or (ii) the expiration of all royalty terms with respect to Licensed Products. The License Agreement may be terminated by us at will or by Stanford if we remain in breach of the License Agreement following a cure period to remedy the breach. We are required to use diligent efforts to manufacture, market and sell Licensed Products for the treatment of each of SCD, XSCID and beta thalassemia. In addition, we are required to achieve specified milestones by specified dates with respect to Licensed Products for the treatment of each of SCD, XSCID and beta thalassemia. If we fail to satisfy our diligence obligations, Stanford may terminate the License Agreement for our breach. For more details on the License Agreement, please see Note 5 of the Notes to Financial Statements. In January 2021, we entered into an option agreement (the “First Option Agreement”), with Stanford, pursuant to which Stanford granted us the right to obtain a license to specified patent rights relating to human prophylactic and therapeutic products. We may exercise the option in whole or in part to obtain a license under one or more of the optioned patent rights. Subject to our exercise of the option under the First Option Agreement and our execution of an amendment to the License Agreement that incorporates the optioned patent rights and any optioned technology, we have agreed to issue to Stanford 132,137 shares of our common stock and pay a license execution fee of $10.0 thousand. The term of the First Option Agreement expires 18 months after its effective date, subject to our right to extend such expiration date by up to an additional one year upon notice to Stanford and by another additional one year upon the reasonable agreement of Stanford. The First Option Agreement will terminate if the License Agreement terminates. As of December 31, 2021, we have not exercised the option and no fees have been paid under the First Option Agreement. In April 2021, we entered into an option agreement (the “Second Option Agreement”) with Stanford to negotiate the license for additional technologies from Stanford. Pursuant to the Second Option Agreement, we agreed to pay Stanford option fees in an aggregate 100 amount of $30.0 thousand over the term of the option. As of December 31, 2021, we have not exercised the option and no fees have been paid under the Second Option Agreement . LCGM Service Agreement On August 30, 2021, we entered into a Master Manufacturing and Service Agreement with the Laboratory for Cell & Gene Medicine (“LCGM”) at Stanford (“LCGM MSA”). Pursuant to the LCGM MSA, LCGM will conduct clinical manufacturing, release testing, and product release for GPH101 in our Phase 1 clinical trial to treat SCD. During 2021, we entered into various SOWs under the LCGM MSA under which we received technology transfer and related services for HBB Beta-Globin Gene Variant for SCD, manufacturing engineer test runs, the exclusive use of a manufacturing suite at the LCGM facility, and Phase 1/2 clinical development and manufacturing of the HBB Variant for SCD. We have recognized $2.7 million in research and development expense in connection with the LCGM MSA as of December 31, 2021. IDT License Agreement On June 7, 2021, we entered into a License Agreement (the “IDT License Agreement”) with Integrated DNA Technologies, Inc. (IDT). Pursuant to the IDT License Agreement, IDT granted us and our affiliates a worldwide, non-exclusive, sublicensable license to research and develop products incorporating HiFi Cas9 protein variants for use in human therapeutic applications for SCD, XSCID and Gaucher disease (the “Field”) and a worldwide, exclusive, sublicensable license to commercialize such products in the Field. We have also been granted the right to expand the licensed Field to include human therapeutic applications in the additional fields of beta thalassemia disorder and lysosomal storage disorders upon the payment of an exercise fee in the amount of $0.5 million per additional field or $1.0 million for both additional fields. In consideration of the licenses and rights granted to us under the IDT License Agreement, we agreed to pay to IDT an upfront payment in the amount of $3.0 million and up to $5.3 million (or $8.8 million if we elect to expand the Field as described above to include both the beta thalassemia and lysosomal storage disorders fields) in total regulatory milestone payments. Each regulatory milestone payment is payable once on an indication-by-indication basis. In addition, we have agreed to pay IDT a low single-digit royalty on the net sales of products, subject to reductions in specified circumstances. The acquisition of the license was accounted for as an asset acquisition and as the acquired technology did not have an alternative use, the total consideration of $3.0 million was recorded as research and development expense in the statement of operations and comprehensive loss for the year ended December 31, 2021. The IDT License Agreement remains in effect on a country-by-country and product-by-product basis until the expiration of the royalty term for such product in such jurisdiction. We and IDT each have the right to terminate the IDT License Agreement for the other party’s material breach of its obligations under the IDT License Agreement, subject to specified rights to cure. Additionally, we may terminate the IDT License Agreement for any reason upon written notice. Initial Public Offering In June and July 2021, we completed an initial public offering of our common stock. As part of the IPO, we issued and sold 16,100,000 shares of our common stock at a public offering price of $17.00 per share. In June and July 2021, we received net proceeds of approximately $251.3 million from the IPO, after deducting underwriting discounts and commissions of $19.1 million and offering costs of approximately $3.2 million. Components of Results of Operations Operating Expenses Research and Development Research and development costs consist primarily of external and internal costs incurred for our research activities and the development of our gene editing platform and associated rights which we licensed in December 2020. External costs include: • costs incurred under agreements with third-party CROs, CMOs and other third parties that conduct preclinical and clinical activities on our behalf and manufacture our product candidates; • costs associated with acquiring technology and intellectual property licenses that have no alternative future uses; and • other costs associated with our research and development programs, including laboratory materials and supplies and consulting fees. Internal costs include: • employee-related costs, including salaries, benefits and stock-based compensation expense, for our research and development personnel; and • facilities and other expenses incurred in connection with our research and development programs, including expenses for allocated rent and facilities maintenance, and depreciation and amortization . 101 Research and development costs are expensed as incurred. In 2020, we did not track our internal indirect costs and external research and development costs by program. The intellectual property we licensed in late 2020 is fundamental to our platform and we did not focus on any specific programs. In the future, we expect to track research and development costs on a program-by-program basis as we identify the specific programs and product candidates to develop . During 2021 and 2020, we were eligible for a research and development tax credit. The tax incentive was available to us based on research and development activity within the United States and California during that year. These research and development tax incentives are recognized as a reduction to payroll tax expense when the right to receive has been attained and funds are collectible and are capped at $250 .0 thousand per year. We expect our research and development expenses to increase substantially for the foreseeable future as we advance our product candidates into and through preclinical studies and clinical trials, pursue regulatory approval of our product candidates and expand our pipeline of product candidates. The process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming. The actual probability of success for our product candidates may be affected by a variety of factors, including the safety and efficacy of our product candidates, early clinical data, investment in our clinical programs, competition, manufacturing capability and commercial viability. We may never succeed in achieving regulatory approval for any of our product candidates. As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects or if, when and to what extent we will generate revenue from the commercialization and sale of our product candidates, if approved by the FDA and other applicable authorities. Our future research and development costs may vary significantly based on factors such as: • the scope, rate of progress, expense and results of our discovery and preclinical development activities; • the costs and timing of our CMC activities, including fulfilling GMP-related standards and compliance, and identifying and qualifying suppliers; • per patient clinical trial costs; • the number and duration of clinical trials required for approval of our product candidates; • the number of sites included in our clinical trials; • the countries in which the trials are conducted; • delays in adding a sufficient number of trial sites and recruiting suitable patients to participate in our clinical trials; • the number of patients that participate in the trials; • patient drop-out or discontinuation rates; • potential partial reimbursement from governmental agencies for our clinical activities; • potential additional safety monitoring requested by regulatory agencies; • the duration of patient participation in the trials and follow-up; • the cost and timing of manufacturing our product candidates; • the phase of development of our product candidates; • the efficacy and safety profile of our product candidates; the timing, receipt, and terms of any approvals from applicable regulatory authorities including the FDA and non-U.S. regulators; • maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates; • significant and changing government regulation and regulatory guidance; • changes in the standard of care on which a clinical development plan was based, which may require new or additional trials; • the extent to which we establish additional strategic collaborations or other arrangements; and • the impact of any business interruptions to our operations or to those of the third parties with whom we work, particularly in light of the current COVID-19 pandemic environment. General and Administrative Expenses General and administrative expenses consist primarily of expenses related to employee-related costs, including salaries, benefits and stock-based compensation expense, for our executive, business development, finance and accounting, human resources and other administrative functions; legal services, including relating to intellectual property and corporate matters; accounting, auditing, consulting and tax services; insurance; and facility and other allocated costs not otherwise included in research and development expenses. We expect our general and administrative expenses to increase substantially for the foreseeable future as we anticipate an increase in our 102 personnel headcount to support expansion of research and development activities, as well as to support our operations generally. We also expect an increase in expenses associated with being a public company, including costs related to accounting, audit, legal, regulatory, and tax-related services associated with maintaining compliance with applicable Nasdaq and SEC requirements; director and officer insurance costs; and investor and public relations costs . Other Income (Expense), Net Other income (expense), net includes interest expense incurred on our convertible notes and changes in the fair value of our redeemable convertible preferred stock tranche liabilities. Results of Operations Years Ended December 31, 2021 and 2020 The following table summarizes our statements of operations and comprehensive loss for the respective years (in thousands): Year Ended December 31, 2021 2020 Operating expenses: Research and development $ 37,932 $ 9,123 General and administrative 22,511 4,377 Total operating expenses 60,443 13,500 Loss from operations (60,443 ) (13,500 ) Other income (expense), net: Other income, net 24 — Related party convertible note interest expense — (40 ) Change in fair value of the Series A redeemable convertible preferred stock tranche liability (10,341 ) (54,833 ) Total other income (expense), net (10,317 ) (54,873 ) Net loss and comprehensive loss $ (70,760 ) $ (68,373 ) Operating Expenses Research and Development Expenses Research and development expenses were $37.9 million for the year ended December 31, 2021 compared to $9.1 million for the year ended December 31, 2020, an increase of $28.8 million. The increase in research and development expenses was primarily attributable to an increase of $12.6 million in clinical trial related activities and contract manufacturing activities for our clinical trials and drug supply, $9.9 million of personnel costs including associated stock-based compensation expense, and $6.3 million of other research and development costs primarily related to facilities costs and lease expense associated with facilities and service agreements. General and Administrative Expenses General and administrative expenses were $ 22.5 million for the year ended December 31 , 2021 compared to $ 4.4 million for the year ended December 31 , 2020, an increase of $18.1 million. The increase in general and administrative expenses was comprised of an additional $9.2 million of consulting and personnel-related costs associated primarily attributable to increased hiring of general and administrative personnel, including associated stock-based compensation expense. We also incurred additional professional service costs of $8.0 million related to legal costs, accounting, financial service, and insurance costs, as well as other miscellaneous expenses of $ 0.9 million. Other Income (Expense), Net Other income (expense), net decreased by $ 44.6 million for the year ended December 31 , 2021 compared to the year ended December 31 , 2020. The period-over-period change is primarily related to the change in the fair value of our Series A redeemable convertible preferred stock tranche liability. Liquidity and Capital Resources We have incurred losses since inception and have incurred negative cash flows from operations from inception through December 31 , 2021. As of December 31 , 2021, we had $ 378.7 million of cash, cash equivalents and restricted cash and our accumulated deficit was $ 141.4 million. In June and July 2021, we raised net proceeds of $251.3 million in our IPO, pursuant to which we sold an aggregate of 16,100,000 shares of common stock. 103 Prior to our IPO, w e funded our operations primarily from the sale of redeemable convertible preferred stock and issuance of convertible promissory notes. Future Funding Requirements Our primary uses of cash are to fund our operations, which consist primarily of research and development expenditures related to our programs and, to a lesser extent, general and administrative expenditures. We anticipate that we will continue to incur significant expenses for the foreseeable future as we continue to advance our product candidates, expand our corporate infrastructure, including the costs associated with being a public company, further our research and development initiatives for our product candidates, scale our laboratory and manufacturing operations, and incur marketing costs associated with potential commercialization. We are subject to all of the risks typically related to the development of new drug candidates, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. We anticipate that we will need substantial additional funding in connection with our continuing operations. Based upon our current operating plan, we estimate that our existing cash and cash equivalents as of the date of the filing of this Form 10-K, will be sufficient to fund our operating expenses and capital expenditure requirements into the fourth quarter of 2024. Until we can generate sufficient revenues from the commercialization of our product candidates or from collaboration agreements with third parties, if ever, we expect to finance our future cash needs through public or private equity or debt financings, collaborations and other strategic alliances and licensing arrangements, or any combination of these approaches. The sale of equity or convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. Debt financings may subject us to covenant limitations or restrictions on our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our ability to raise additional funds may be adversely impacted by negative global economic conditions and any disruptions to and volatility in the credit and financial markets in the United States and worldwide that may result from the ongoing COVID-19 pandemic or other factors. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable or acceptable to us. If we are unable to obtain adequate financing when needed or on terms favorable or acceptable to us, we may be forced to delay, reduce the scope of or eliminate one or more of our research and development programs. Our future capital requirements will depend on many factors, including: • the timing, scope, progress, results and costs of research and development, discovery, preclinical and non-clinical studies and clinical trials for our current and future product candidates; • the number, scope and duration of clinical trials required for regulatory approval of our current and future product candidates; • the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities for our product candidates, including any requirement to conduct more studies or generate additional data beyond that which we currently expect would be required to support a marketing application; • the cost of manufacturing clinical and commercial supplies of our current and future product candidates; • the costs and timing of future commercialization activities, including product manufacturing, marketing, sales and distribution, for any of our product candidates for which we receive marketing approval; • our ability to maintain existing, and establish new, strategic collaborations, licensing or other arrangements and the financial terms of any such agreements, including the timing and amount of any future milestone, royalty or other payments due under any such agreement; • any product liability or other lawsuits related to our products; • the revenue, if any, received from commercial sales of any product candidates for which we may receive marketing approval; • our ability to establish a commercially viable pricing structure and obtain approval for coverage and adequate reimbursement from third-party and government payers; • the costs to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing our patents or other intellectual property rights; • expenses needed to attract, hire and retain skilled personnel; • the costs of operating as a public company; and • the impact of the ongoing COVID-19 pandemic, which may exacerbate the magnitude of the factors discussed above . A change in the outcome of any of these or other variables could significantly change the costs and timing associated with the development of our product candidates. Furthermore, our operating plans may change in the future, and we may need additional funds to meet operational needs and capital requirements associated with such change. 104 Cash Flows The following table summarizes our sources and uses of cash for the periods presented (in thousands): Year Ended December 31, 2021 2020 Net cash used in operating activities $ (52,852 ) $ (8,721 ) Net cash used in investing activities (5,740 ) (1,545 ) Net cash provided by financing activities 417,467 30,077 Net increase in cash, cash equivalents and restricted cash $ 358,875 $ 19,811 Cash Flows from Operating Activities Net cash used in operating activities was $ 52.9 million for the year ended December 31, 2021, which was primarily attributable to our net loss of $70.8 million and net changes in operating assets and liabilities of $ 2.5 million, adjusted for net noncash charges of $ 20.4 million. Net noncash charges included approximately $10.3 million change in the fair value of the Series A redeemable convertible preferred stock tranche liability, $7.9 million in stock-based compensation expense, $ 0.7 million in depreciation and amortization expense, and $ 1.5 million in noncash lease expense. Net changes in operating assets and liabilities primarily consists of $2.2 million in accrued compensation and $1.0 million in accounts payable and accrued expenses, offset by $3.9 million in prepaid expenses and $1.8 million in operating lease liabilities. Net cash used in operating activities was $8.7 million for the year ended December 31, 2020, which was primarily attributable to our net loss for the year of $68.4 million, adjusted for non-cash charges of $57.9 million and net changes in operating assets and liabilities of $1.8 million. The net noncash charges included approximately $54.8 million change in the fair value of the redeemable convertible preferred stock tranche liabilities and $2.8 million for the shares of common stock issuable to Stanford pursuant to the License Agreement, $0.2 million in stock-based compensation expense, and $0.1 million in depreciation and amortization expenses. Net changes in operating assets and liabilities primarily consists of $2.5 million in accounts payable and accrued expenses and $0.5 million in accrued compensation, offset by $1.2 million increase in prepaid expenses. Cash Flows from Investing Activities Net cash used in investing activities was $ 5.7 million for the year ended December 31, 2021, which was primarily attributable to the purchase of lab equipment for use at our headquarters. Net cash used in investing activities was $1.5 million for the year ended December 31, 2020, which was primarily attributable to the purchase of lab equipment for use at our headquarters. Cash Flows from Financing Activities Net cash provided by financing activities was $417.5 million for the year ended December 31, 2021, which consisted primarily of proceeds from issuance of common stock in our initial public offering of $251.3 million including proceeds from the exercise of the underwriter option in July 2021, proceeds from the issuance of Series A and Series B redeemable convertible preferred stock of $165.5 million, and proceeds from issuance of common stock related to early exercised stock options, stock option grants, and employee stock purchase plan of $0.7 million. Net cash provided by financing activities was $30.1 million for the year ended December 31, 2020, which consisted primarily of proceeds from the issuance of shares of our Series A redeemable convertible preferred stock of $24.8 million in two tranches, proceeds from issuance of convertible note to related party of $5.0 million, and proceeds from the issuance of common stock related to early exercised stock options and stock option grants of $0.3 million. Recently Adopted Accounting Pronouncements For information on new accounting standards, see Note 2 to our financial statements included in Part II in this Annual Report . Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including but not limited to those related to accrued research and development costs, the fair value of derivative redeemable convertible preferred stock tranche liabilities, the fair value of redeemable convertible preferred stock and common stock and stock-based compensation expense, the valuation of deferred tax assets, and uncertain income tax positions. We 105 base our estimates on historical experience, known trends and events and various other factors that are 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 that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates. Accrued research and development expenses As part of the process of preparing our financial statements, we estimate our accrued research and development expenses at each balance sheet date. This process involves reviewing purchase orders and open contracts, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments as necessary. The significant estimates in our accrued research and development expenses include the costs incurred for services performed by CROs and CMOs in connection with research and development activities for which we have not yet been invoiced. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made. Although we do not expect our estimates to be materially different from amounts incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred. Leases On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. For contracts entered into on or after the effective date, at the inception of a contract, we assess whether the contract is, or contains, a lease. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease. The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, if any, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For real estate leases and other operating leases, we use our secured incremental borrowing rate. For finance leases, we use the rate implicit in the lease or our secured incremental borrowing rate if the implicit lease rate cannot be determined. Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early. 106 Lease cost for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions and is recognized on a straight-line basis over the lease term. Included in lease cost are any variable lease payments incurred in the period that are not included in the initial lease liability and lease payments incurred in the period for any leases with an initial term of 12 months or less. Lease cost for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense. Leasehold improvements are not unique and are retained by the lessor at the end of the lease. However, we are the accounting owner of the leasehold improvements in the case of a space designed to be suitable for our specific real estate needs if we are also responsible for cost overruns. We elected to make an accounting policy of the short-term leases exemption to leases with a remaining lease term of less than 12 months as at the date of initial adoption. Stock-based compensation We measure stock options and other stock-based awards granted to our employees, directors, consultants or founders based upon their fair value on the date of the grant and recognize stock-based compensation expense over the requisite service period, which is generally the vesting period of the respective award. We recognize forfeitures as they occur. The majority of our stock-based compensation awards are subject to either service- or performance-based vesting conditions. We apply the straight-line method of expense recognition to all awards with service-based vesting and recognize stock-based compensation for performance-based awards over the service period using the accelerated attribution method to the extent achievement of the of performance condition is probable. We estimate the fair value of each stock option grant on the date of grant using the Black-Scholes option-pricing model, which uses inputs such as the fair value of our common stock, assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield. The fair value of our common stock is used to determine the fair value of restricted stock awards. Prior to our IPO in June 2021, there was no public market for our common stock. As a result, prior to our IPO, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, considering our most recently available third-party valuations of common stock and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Following our IPO, the fair value of our common stock is determined based on the quoted market price of our common stock. Emerging Growth Company and Smaller Reporting Entity Status We are an emerging growth company, as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor’s report on internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended, an exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. However, as described in Note 2 to our financial statements included elsewhere in this Annual Report, we early adopted certain accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies to the extent early adoption is permitted. As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of: (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.07 billion or more, (ii) December 31, 2026, (iii) the date on which we are deemed to be a “large accelerated filer,” under the rules of the SEC, which means the market value of equity securities that is held by non-affiliates exceeds $700.0 million as of the prior June 30th and (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. If we are a “smaller reporting company” at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. 107 Item 7A. Quantitative and Qualitat ive Disclosures about Market Risk . Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item. 108 Item 8. Financial Statement and Other Supplementary Information. Graphite Bio, Inc. INDEX TO FINANCIAL STATEMENTS Index to Audited Financial Statements as of and for the Years Ended December 31, 2021 and 2020: Page Report of Independent Registered Public Accounting Firm 110 Balance Sheets 111 Statements of Operations and Comprehensive Loss 112 Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit 113 Statements of Cash Flows 114 Notes to Financial Statements 115 109 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Graphite Bio, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Graphite Bio, Inc. (the "Company") as of December 31, 2021 and 2020, the related statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' deficit, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP San Francisco, California March 20, 2022 We have served as the Company’s auditor since 2021. 110 Graphite Bio, Inc. Balance Sheets (in thousands, except share and per share data) December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 376,976 $ 19,782 Restricted cash — 35 Prepaid expenses and other current assets 4,760 1,286 Total current assets 381,736 21,103 Restricted cash, non-current 1,716 — Property, plant and equipment, net 6,507 1,461 Operating lease right-of-use assets 11,574 — Other assets 454 — Total assets $ 401,987 $ 22,564 Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) Current liabilities: Accounts payable $ 2,453 $ 630 Accrued compensation 2,689 466 Accrued research costs 633 1,764 Accrued expenses and other current liabilities 886 126 Current portion of operating lease liabilities 5,482 — Series A redeemable convertible preferred stock tranche liability — 29,062 Total current liabilities 12,143 32,048 Non-current operating lease liabilities 5,794 — Other liabilities — 316 Total liabilities 17,937 32,364 Commitments and contingencies (Note 6) Series A redeemable convertible preferred stock, $ 0.00001 par value; zero and 45,024,986 shares authorized as of December 31, 2021 and 2020, respectively; zero and 30,019,945 shares issued and outstanding as of December 31, 2021 and 2020, respectively; aggregate liquidation preference of $ 30,020 as of December 31, 2020 — 55,608 Stockholders’ equity (deficit): Preferred stock, $ 0.00001 par value, 10,000,000 and zero shares authorized as of December 31, 2021 and 2020, respectively; and no shares issued and outstanding as of December 31, 2021 and 2020, respectively; — — Common stock, $ 0.00001 par value, 300,000,000 and 80,000,000 shares authorized as of December 31, 2021 and 2020, respectively; 58,010,823 and 10,279,102 shares issued and outstanding as of December 31, 2021 and 2020, respectively 1 — Additional paid-in-capital 525,400 5,183 Accumulated deficit ( 141,351 ) ( 70,591 ) Total stockholders’ equity (deficit) 384,050 ( 65,408 ) Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) $ 401,987 $ 22,564 The accompanying notes are an integral part of these financial statements. 111 Graphite Bio, Inc. Statements of Operations and Comprehensive Loss (in thousands, except share and per share data) Year Ended December 31, 2021 2020 Operating expenses: Research and development $ 37,932 $ 9,123 General and administrative 22,511 4,377 Total operating expenses 60,443 13,500 Loss from operations ( 60,443 ) ( 13,500 ) Other income (expense), net: Other income, net 24 — Related party convertible note interest expense — ( 40 ) Change in fair value of the Series A redeemable convertible preferred stock tranche liability ( 10,341 ) ( 54,833 ) Total other income (expense), net ( 10,317 ) ( 54,873 ) Net loss and comprehensive loss $ ( 70,760 ) $ ( 68,373 ) Net loss per share attributable to common stockholders—basic and diluted $ ( 2.45 ) $ ( 29.93 ) Weighted-average shares used in computing net loss per share—basic and diluted 28,919,255 2,284,087 The accompanying notes are an integral part of these financial statements. 112 Graphite Bio, Inc. Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit (in thousands, except share data) Total Redeemable Convertible Preferred Stock Common Additional Stockholders’ Series A Series B Stock Paid in Accumulated Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balance at December 31, 2019 — $ — — $ — — $ — $ — $ ( 2,218 ) $ ( 2,218 ) Common stock issued to founders and investor — — — — 8,548,517 — — — — Issuance of restricted common stock — — — — 832,983 — — — — Issuance of redeemable convertible preferred stock upon conversion of outstanding related party convertible note and accrued interest 5,019,945 5,020 — — — — — — — Related party convertible note and accrued interest cancellation — — — — — — 2,225 — 2,225 Issuance of redeemable convertible preferred stock for cash, net of issuance costs of $ 184 and fair value of tranche liability of $ 3,329 25,000,000 21,488 — — — — — — — Reclassification of tranche liability upon settlement — 29,100 — — — — — — — Obligation to issue common stock shares for license — — — — — — 2,772 — 2,772 Stock-based compensation expense — — — — — — 177 — 177 Common stock issued upon early exercise of options — — — — 897,602 — — — — Vesting of early exercised stock options — — — — — — 9 — 9 Net loss and comprehensive loss — — — — — — — ( 68,373 ) ( 68,373 ) Balance at December 31, 2020 30,019,945 $ 55,608 — $ — 10,279,102 $ — $ 5,183 $ ( 70,591 ) $ ( 65,408 ) Common stock issued upon exercise of options — — — — 33,906 — 42 — 42 Common stock issued upon early exercise of options — — — — 918,825 — — — — Common stock issued under ESPP — — — — 39,894 306 — 306 Issuance of Series A redeemable convertible preferred stock for cash, net of issuance costs of $ 4 15,000,000 14,997 — — — — — — — Issuance of Series B redeemable convertible preferred stock for cash, net of issuance costs of $ 226 — — 29,792,487 150,524 — — — — — Reclassification of tranche liability upon settlement — 39,403 — — — — — — — Issuance of common stock in connection with License Agreement with Stanford — — — — 640,861 — — — — Repurchase of common stock in connection with terms of License Agreement with Stanford — — — — ( 624,845 ) — — — — Issuance of common stock upon initial public offering, net of issuance costs — — — — 16,100,000 — 251,323 — 251,323 Conversion of redeemable convertible preferred stock to common stock at closing of initial public offering ( 45,019,945 ) ( 110,008 ) ( 29,792,487 ) ( 150,524 ) 30,761,676 1 260,531 — 260,532 Vesting of early exercised stock options — — — — — — 144 — 144 Repurchase of unvested early exercised stock options — — — — ( 138,596 ) — — — — Stock-based compensation expense — — — — — — 7,871 — 7,871 Net loss and comprehensive loss — — — — — — — ( 70,760 ) ( 70,760 ) Balance at December 31, 2021 — $ — — $ — 58,010,823 $ 1 $ 525,400 $ ( 141,351 ) $ 384,050 The accompanying notes are an integral part of these financial statements 113 Graphite Bio, Inc. Statements of Cash Flows (in thousands) Year Ended December 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 70,760 ) $ ( 68,373 ) Adjustments to reconcile net loss to net cash used in operations: Depreciation and amortization 734 121 Noncash lease expense 1,460 — Interest expense related to convertible notes — 40 Stock-based compensation expense 7,871 177 Change in fair value of the Series A redeemable convertible preferred stock tranche liability 10,341 54,833 Issuance of common stock to Stanford — 2,772 Changes in assets and liabilities: Prepaid expenses and other current assets and other assets ( 3,914 ) ( 1,286 ) Accounts payable 1,825 594 Accrued compensation 2,223 466 Accrued research costs ( 1,131 ) 1,764 Accrued expenses and other current liabilities and other liabilities 257 171 Operating lease liabilities ( 1,758 ) — Net cash used in operating activities ( 52,852 ) ( 8,721 ) Cash flows from investing activities: Purchases of property and equipment ( 5,740 ) ( 1,545 ) Net cash used in investing activities ( 5,740 ) ( 1,545 ) Cash flows from financing activities: Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs 165,521 24,816 Proceeds from issuance of common stock under initial public offering, net of issuance costs 251,323 — Proceeds from issuance of convertible note to related party — 5,000 Proceeds from issuance of common stock upon exercise of stock options 28 — Proceeds from issuance of common stock upon early exercises of stock options 289 261 Proceeds from issuance under employee stock purchase plan 306 — Net cash provided by financing activities 417,467 30,077 Net increase in cash, cash equivalents and restricted cash 358,875 19,811 Cash, cash equivalents and restricted cash, at beginning of period 19,817 6 Cash, cash equivalents and restricted cash, at end of period $ 378,692 $ 19,817 Reconciliation of cash, cash equivalents and restricted cash to statement of financial position: Cash and cash equivalents 376,976 19,782 Restricted cash 1,716 35 Cash, cash equivalents and restricted cash in statement of financial position $ 378,692 $ 19,817 Supplemental disclosures of non-cash investing and financing information: Issuance of redeemable convertible preferred stock upon conversion of outstanding related party convertible note and accrued interest $ — $ 5,020 Related party convertible note and accrued interest cancellation $ — $ ( 2,225 ) Purchases of property and equipment included in accounts payable $ ( 75 ) $ ( 35 ) Settlement of redeemable convertible preferred stock tranche liability $ ( 39,403 ) $ ( 29,100 ) Conversion of redeemable convertible preferred stock to common stock at closing of initial public offering $ 260,532 $ — Additions to right-of-use assets from new operating lease liabilities $ 13,034 $ — Vesting of early exercised stock options $ 144 $ 9 Repurchase of unvested early exercised shares included in accounts payable $ ( 42 ) $ — Proceeds from issuance of common stock upon exercise of stock options included in accounts receivable $ ( 14 ) $ — The accompanying notes are an integral part of these financial statements. 114 Graphite Bio, Inc. Notes to Financial Statements 1. Description of Business, Organization and Liquidity Organization and Business Graphite Bio, Inc. (the “Company”) is a clinical-stage, next-generation gene editing company harnessing high-efficiency targeted gene integration to develop a new class of therapies to potentially cure a wide range of serious and life-threatening diseases. The Company is pioneering a precision gene editing approach to achieve one of medicine’s most elusive goals: to precisely “find & replace” any gene in the genome. The Company’s next-generation gene editing platform allows the Company to precisely correct mutations, replace entire disease-causing genes with normal genes, or insert new genes into predetermined, safe locations. The Company’s lead product candidate GPH101 is a highly differentiated approach with the potential to directly correct the mutation that causes sickle cell disease (SCD) and restore normal adult hemoglobin (HgbA) expression. On November 17, 2021, the Company announced the enrollment of the first patient in the Company’s Phase 1/2 clinical trial of GPH101. The Company expects to report initial proof-of-concept data in 2023. From its inception in 2017, the Company’s primary activities have been to perform research and development, undertake preclinical studies and enable manufacturing activities in support of its product development efforts, organize and staff the Company, establish its intellectual property portfolio, and raise capital to support and expand such activities. The Company was incorporated in Ontario, Canada in June 2017 as Longbow Therapeutics Inc., and was reincorporated in the State of Delaware in October 2019. In February 2020, the Company changed its name to Integral Medicines, Inc., and again in August 2020, changed the name to Graphite Bio, Inc. Research and development of the Company’s initial technology ceased at the end of 2018, and the Company did not have any significant operations or any research and development activities in 2019. In March 2020, the Company identified new gene editing technology which the Company sought to further develop, and the Company licensed the related intellectual property rights from The Board of Trustees of the Leland Stanford Junior University (“Stanford”) in December 2020 (Note 5). Reverse Stock Split On June 18, 2021, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse stock split of the Company’s issued and outstanding common stock at a 1 for 2.432 ratio, which was effected on June 21, 2021. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding common stock, options to purchase common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented. The financial statements have also been retroactively adjusted to reflect a proportional adjustment to the conversion ratio for each series of preferred stock that was effected in connection with the reverse stock split. Initial Public Offering On June 24, 2021, the Company’s registration statement on Form S-1 relating to its initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”) and the shares of its common stock began trading on the Nasdaq Global Market on June 25, 2021. The IPO closed on June 29, 2021 , pursuant to which the Company issued and sold 14,000,000 shares of its common stock at a public offering price of $ 17.00 per share. On July 2, 2021, the Company issued 2,100,000 shares of its common stock to the underwriters of the IPO pursuant to the full exercise of their option to purchase additional shares. The Company received in June and July 2021 net proceeds of approximately $ 251.3 million from the IPO, after deducting underwriting discounts and commissions of $ 19.1 million and offering costs of approximately $ 3.2 million. Prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 30,761,676 shares of common stock. Liquidity Matters The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s operations have historically been financed through the issuance of common and redeemable convertible preferred stock. The Company has incurred significant operating losses and negative net cash flows from operations since inception. During the year ended December 31, 2021, the Company incurred a net loss of $ 70.8 million and had negative net cash flows from operating activities of $ 52.9 million. The Company had an accumulated deficit of $ 141.4 million as of December 31, 2021 and will continue to require substantial additional capital for research and development activities. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant sales of its drug candidates currently in development. As of December 31, 2021, the Company had cash, cash equivalents and restricted cash of $ 378.7 million. Management believes that its existing cash, cash equivalents and restricted cash are sufficient to continue operating activities for at least 12 months following the issuance date of these financial statements. 115 Coronavirus Pandemic In March 2020, the World Health Organization declared the global novel coronavirus disease 2019 (“COVID-19”) outbreak a pandemic. The ongoing COVID-19 pandemic may continue to affect the Company’s ability to initiate and complete preclinical studies, delay the initiation of its planned clinical trials or future clinical trials or the progress or completion of its ongoing clinical trials, impede regulatory activities, disrupt the supply chain and the manufacture or shipment of drug substances and finished drug products for its product candidates for use in its clinical trials, impair testing, monitoring, data collection and analysis and other related activities, or have other adverse effects on the Company’s business, financial condition, results of operations and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could result in adverse effects on the Company’s business and operations and its ability to raise additional funds to support its operations. While certain measures have been relaxed in certain parts of the world as increasing numbers of people have received COVID-19 vaccines, others have remained in place with some areas continuing to experience renewed outbreaks and surges in infection rates. The extent to which such measures are removed or new measures are put in place will depend upon how the pandemic evolves, as well as the distribution of available vaccines, the rates at which they are administered and the emergence of new variants of the virus. The Company is following, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention as well as federal, state, and local governments regarding working-from-home practices for non-essential employees as well as return-to-work policies and procedures. The Company expects to continue to take actions as may be required or recommended by government authorities or as the Company determines are in the best interests of its employees and other business partners in light of the pandemic. The recent surge of the COVID-19 Omicron variant, which began around the same time that the Company’s Phase 1/2 clinical trial of GPH101 initially opened for enrollment, has impacted trial enrollment and site operations, including resourcing and staffing, resulting in a delay in timelines to anticipated data. In particular, the treatment of the first patient in the Phase 1/2 clinical trial was delayed due to a prospective participant becoming infected with COVID-19. The impact of the COVID-19 pandemic on the Company’s financial performance will depend on future developments, including the duration and spread of the pandemic, including new variants of the virus, its impact on the Company’s clinical trial enrollment, trial sites, contract research organizations (“CROs”), contract manufacturing organizations (“CMOs”), and other third parties with whom it does business, its impact on regulatory authorities and the Company’s key scientific and management personnel, progress of vaccination and related governmental advisories and restrictions. These developments and the impact of the COVID-19 pandemic on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets or the overall economy are impacted for an extended period, the Company’s business may be materially adversely affected. 2. Summary of Significant Accounting Policies Basis of Presentation These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Presentation Reclassification Certain amounts in accrued expenses reported in the Company's prior year financial statements have been reclassified as accrued research costs to conform to the current year presentation. These reclassifications had no net effect on the net loss or net cash flows as previously reported. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates estimates and assumptions, including but are not limited to those related to the fair value of a derivative redeemable convertible preferred stock tranche liabilities, the fair value of redeemable convertible preferred stock and common stock, stock-based compensation expense, accruals for research and development costs, the present value of lease payments of our leases on the respective lease commencement dates, the valuation of deferred tax assets, and uncertain income tax positions. Management bases its estimates on historical experience and on various other assumptions that are 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 that are not readily apparent from other sources. Actual results may differ materially from those estimates. Concentration of Credit Risk Cash and cash equivalents are financial instruments that potentially subject the Company to concentrations of credit risk. Substantially all of the Company’s cash and cash equivalents are deposited in accounts with major financial institution and amounts may exceed federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial 116 strength of the depository institution in which the cash and cash equivalents are held. The Company has not experienced any losses on deposits of cash and cash equivalents. Risks and Uncertainties The Company is subject to certain risks and uncertainties, including, but not limited to, changes in any of the following areas that the Company believes could have a material adverse effect on the future financial position or results of operations: the timing of, and the Company’s ability to advance its current and future product candidates into and through clinical development; costs and timelines associated with the manufacture of clinical supplies of the Company’s product candidates; regulatory approval and market acceptance of, and reimbursement for its product candidates; performance of third-party CROs and CMOs; competition from pharmaceutical companies with greater financial resources or expertise; protection of the intellectual property; litigation or claims against the Company based on intellectual property or other factors; and its ability to attract and retain employees necessary to support its growth. Disruption from CROs’, CMOs’ or suppliers’ operations would likely have a negative impact on the Company’s business, financial position and results of operations. Segment and Geographical Information The Company operates and manages its business as one reportable and operating segment. The chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All of the Company’s long-lived assets are based in the United States. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. As of December 31, 2021 and 2020, cash and cash equivalents consisted of cash and money market funds. Restricted Cash Restricted cash of $ 1,716 and $ 35 as of December 31, 2021 and 2020, respectively, represented security deposits in the form of letters of credit issued in connection with the leases of the Company’s headquarters (Notes 5 and 7). Deferred Offering Costs Costs incurred in connection with the IPO primarily consist of direct incremental legal, printing and accounting fees. IPO costs are capitalized as incurred and will be offset against proceeds upon consummation of the offering. In the event the offering had been terminated or abandoned, deferred IPO costs would have been expensed in the period such determination had been made. No deferred offering costs were capitalized as of December 31, 2021 and 2020. Property and Equipment, Net Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years . Repairs and maintenance expenditures, which are not considered improvements and do not extend the useful life of property and equipment, are expensed as incurred. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation and amortization are removed from the balance sheet and the resulting gain or loss is reflected in the statements of operations and comprehensive loss in the period realized. Leases Effective January 1, 2021, the Company adopted ASC Topic 842, Leases (“ASC 842”) using the optional transition method and applied the standard only to leases that existed at that date. Under the optional transition method, the Company does not need to restate the comparative periods in transition and will continue to present financial information and disclosures for periods before January 1, 2021 in accordance with ASC Topic 840. The Company has elected the package of practical expedients allowed under ASC Topic 842, which permits the Company to account for its existing operating leases as operating leases under the new guidance, without reassessing the Company’s prior conclusions about lease identification, lease classification and initial direct cost. As a result of the adoption of the new lease accounting guidance on January 1, 2021, the Company recognized no cumulative adjustment to accumulated deficit since the Company had only one operating lease with a term of less than 12 months and no plans to extend the lease. On January 27, 2021, the Company entered into a lease agreement for office and lab space in South San Francisco, CA that included two office suites. The lease terms for the office suites commenced in July and August 2021, respectively. Upon commencement of the leases, the Company recognized operating lease right-of-use assets of $ 4.1 million and operating lease liabilities of $ 4.1 million (see Note 7). On August 30, 2021, the Company entered into a service agreement with The Laboratory for Cell and Gene Medicine (“LCGM”) that included an embedded operating lease as the manufacturing suite in LCGM’s facility is designated for the Company’s exclusive use though April 30, 2023 . Upon commencement of the agreement, the Company recognized operating lease right-of-use assets of $ 5.3 million and operating lease liabilities of $ 5.3 million (see Notes 5 and 7). 117 On November 10, 2021, the Company entered into a sublease agreement for office space in Brisbane, CA. The lease terms for the sublease commenced in December 2021. Upon commencement of the lease, the Company recognized operating lease right-of-use assets of $ 3.2 million and operating lease liabilities of $ 3.2 million (see Note 7). On November 17, 2021, the Company entered into a service agreement with Explora BioLabs, Inc (“Explora”) that included an embedded operating lease as the vivarium space is designated for the Company’s exclusive use through November 2023. Upon commencement of the lease, the Company recognized operating lease right-of-use assets of $ 0.6 million and operating lease liabilities of $ 0.6 million (see Notes 5 and 7). The Company determines the initial classification and measurement of its right-of-use assets and lease liabilities at the lease commencement date and thereafter if modified. The lease term includes any renewal options and termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate. The incremental borrowing rate is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. Fixed lease expense for operating leases is recognized on a straight-line basis, unless the right-of-use assets have been impaired, over the reasonably assured lease term based on the total lease payments and is included in operating expenses in the statements of operations and comprehensive loss. Variable lease expenses are recognized as incurred. Fixed and variable lease expense on operating leases is recognized within operating expenses in the statements of operations and comprehensive loss. For operating leases for which the right-of-use assets have been impaired, the Company will recognize the amortization of the right-of-use assets on a straight-line basis over the remaining respective lease term with lease expense included in operating expenses in the statements of operations and comprehensive loss. For all leases, rent payments that are based on a fixed index or rate at the lease commencement date are included in the measurement of lease assets and lease liabilities at the lease commencement date. The Company has elected the practical expedient to not separate lease and non-lease components. The Company’s non-lease components are primarily related to maintenance, insurance and taxes, which varies based on future outcomes and is thus recognized in lease expense when incurred. Asset Acquisitions The Company measures and recognizes asset acquisitions that are not deemed to be business combinations based on the cost to acquire the assets, which includes transaction costs. Goodwill is not recognized in asset acquisitions. In an asset acquisition, the cost allocated to acquire in-process research and development (“IPR&D”) with no alternative future use is charged to research and development expense at the acquisition date. Please refer to Note 6 for more details on asset acquisition. Impairment of Long-Lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparing the carrying amount to the future undiscounted net cash flows which the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows generated by the assets. There have been no such impairments of long-lived assets in the years ended December 31, 2021 and 2020. Redeemable Convertible Preferred Stock Tranche Liabilities The Company has determined that its obligation to issue additional shares of redeemable convertible preferred stock upon the occurrence of certain events or the Company’s Board of Directors (the “Board”) consent represents a freestanding financial instrument. The instrument is classified as a liability on the balance sheets and is subject to re- measurement at each balance sheet date and at the settlement date, any change in fair value is recognized through other income (expense) in the statements of operations and comprehensive loss. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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. The carrying amounts of financial instruments, including restricted cash, prepaid expenses and other current assets, accounts payable, accrued compensation, accrued expenses, and other liabilities, approximate fair value due to their short-term maturities. The cash invested in money-market funds and redeemable convertible preferred stock tranche liability are carried at fair value. 118 Research and Development Expenses Research and development costs are expensed as incurred. Research and development costs include salaries, stock-based compensation, and benefits for employees performing research and development activities, an allocation of facility and overhead expenses, expenses incurred under agreements with consultants, CMOs, CROs and investigative sites that conduct preclinical studies, other supplies and costs associated with product development efforts, preclinical activities, and regulatory operations. Accrued Research and Development Expenses The Company has entered into various agreements with outsourced vendors, CROs and CMOs. Research and development accruals are estimated based on the level of services performed, progress of the studies, including the phase or completion of events, and contracted costs. The estimated costs of research and development services provided, but not yet invoiced, are included in accrued research costs on the balance sheets. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments made under these arrangements in advance of the performance of the related services are recorded as prepaid expenses and other current assets until the services are rendered. To date, there have been no material differences between estimates of such expenses and the amounts actually incurred. Tax Credit Receivable The Company is eligible for federal and California research and development credits for its research and development activities performed within the United States and California, respectively. The credits are, generally, available to offset federal and California income tax liabilities as applicable. The Company has applied $ 0.5 million of federal research and development credits to offset its federal payroll tax expenses as of the year ended December 31, 2021 due to its small business status. The Company is electing to utilize $ 0.3 million of current year R&D credit generated against the employer portion of the payroll tax. Income Taxes The Company accounts for income 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 difference 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. In evaluating the ability to recover deferred income tax assets, the Company considers all available positive and negative evidence, including operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event the Company determines that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period when such determination is made. As of December 31, 2021 and 2020, the Company has recorded a full valuation allowance on deferred tax assets. Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax. Stock-Based Compensation Expense The Company’s stock-based equity awards include restricted stock awards and stock options that are granted to employees and consultants that are accounted at fair value on the award grant date. Stock-based compensation expense is recognized over the awards’ vesting period on a straight-line basis and recorded as either research and development or general and administrative expenses in the statements of operations and comprehensive loss based on the function to which the related services are provided. Forfeitures are accounted for as they occur. As there was no public market for the Company’s common stock prior to the initial public offering of its common stock in June 2021, the estimated fair value of common stock was determined by the Company’s board of directors as of the date of each option grant, with input from management, considering third-party valuations of its common stock, as well as the Company’s board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and which may have changed from the date of the most recent third-party valuation through the date of the grant. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation. Following the closing of the initial public offering, the fair value of the Company’s common stock is determined based on the quoted market price of common stock. The Company also lacks company‑specific historical and implied volatility information for its stock. The Company estimates its expected stock price volatility and expected term based on the historical volatility and expected term of publicly traded peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The risk‑free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. There is no expected dividend yield since the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future. 119 Employee Stock Purchase Plan The Company recognizes stock-based expense related to shares issued pursuant to its Employee Stock Purchase Plan on a straight-line basis over the offering period, which is typically 6 months. The first offering period commenced on June 25, 2021 and ended on November 30, 2021 . The second offering period commenced on December 1, 2021 and the third offering period will commence on June 1, 2022. The ESPP allows eligible employees to purchase shares of the Company's common stock at a 15 percent discount on the lower price of either (i) the offering period begin date or (ii) the purchase date. The Company estimates the fair value of shares to be issued under the ESPP using the Black-Scholes option-pricing model. Comprehensive Loss Comprehensive loss includes all changes in equity (net assets) during a period from non-owner sources. There have been no items qualifying as other comprehensive income or loss, and as such, comprehensive loss was the same as net loss for the periods presented. Net Loss Per Share Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock, common stock subject to repurchase, restricted common shares issued, and stock options are considered to be potentially dilutive securities. Basic and diluted net loss attributable to common stockholders per share is presented in conformity with the two-class method required for participating securities. The Company’s redeemable convertible preferred stock contained participation rights in any dividend paid by the Company and was deemed to be a participating security during the year ended December 31, 2020. Restricted shares issued to the founders and upon early exercise of stock options also participate in dividends from the issuance date and are considered participating securities. Participating securities do not have a contractual obligation to share in losses. As such, the net loss was attributed entirely to common stockholders. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods. Adopted and Recent Accounting Pronouncements The Company is a smaller reporting company and an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay the adoption of new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Thus, the Company has elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) the Company is no longer an emerging growth company or (ii) the Company affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. However as described below, the Company early adopted certain accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies to the extent early adoption is permitted. Recently Adopted Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases. Under ASC 842, the Company determines if an arrangement is a lease at inception. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. In determining the present value of lease payments, the Company uses its incremental borrowing rate based on the information available at the lease commencement date if the rate implicit in the lease is not readily determinable. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record right-of-use assets and lease liabilities for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases today and are not recorded on the Company’s balance sheet. For non-public entities, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years, and early adoption is permitted. The Company early adopted the new standard as of January 1, 2021 on a modified retrospective basis with no cumulative adjustment to accumulated deficit since, as of the adoption date, the Company had only one operating lease, with a term of less than 12 months, and no plans to extend. The Company elected to take the practical expedient to not separate lease and non-lease components as part of the adoption. Lease agreements entered into after the adoption of Topic 842 that include lease and non-lease components are accounted for as a single lease component. Beginning on January 1, 2021, the Company’s operating leases, excluding those with terms less than 12 months, will be discounted and recorded as assets and liabilities on the Company’s balance sheet. As of December 31, 2021, the Company had operating lease right-of-use assets of $ 11.6 million and operating lease liabilities of $ 11.3 million related to the lease recorded on its balance sheets. 120 In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) . The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP or other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted the new standard as of January 1, 2021 with no material impact to its financial statements. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Credit Losses. The FASB also issued amendments and the initial ASU, and all updates are included herein as the Credit Losses standard or Topic 326. The new standard updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. As a result of adoption, the Company would present these financial assets, which includes available-for-sale debt securities, at the net amount it expects to collect. The amendment also requires that the Company records credit losses related to its available-for-sale debt securities as an allowance through net income rather than reducing the carrying amount under the historical, other-than-temporary-impairment model. The Company expects to early adopt the new standard as of January 1, 2022 with no material impact on its financial statements. August 2020, the FASB issued ASU No. 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 (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This standard is effective for fiscal years beginning after December 15, 2021, and the Company will adopt this standard as of January 1, 2022, utilizing the modified retrospective method. The Company does not have any convertible instruments as of December 31, 2021 and expects that the adoption of this standard will not have a material impact on its financial statements. 3. Fair Value Measurements Assets and liabilities recorded at fair value on a recurring basis in the balance sheets, as well as assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows: Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 — Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 — Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. An assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. The Company recognizes transfers into and out of levels within the fair value hierarchy in the period in which the actual event or change in circumstances that caused the transfer occurs. As of December 31, 2021 and 2020, Level 1 securities consist of highly liquid money market funds, for which the carrying amounts approximate their fair values due to their short maturities. The Level 3 liability that is measured at fair value on a recurring basis is the redeemable convertible preferred tranche liability. The redeemable convertible preferred stock tranche liability is measured using the option pricing method by estimating the value using the Black-Scholes model. The inputs used in the Black-Scholes model include the fair value of the redeemable convertible preferred stock, the risk-free interest rate, the expected volatility and the expected term when the tranche will be settled. 121 Below are inputs used for the Level 3 liabilities in the year ended December 31, 2020: Redeemable Convertible Preferred Stock Tranche Liability As of December 31, 2020 (1) Value of Series A Preferred Stock per share $ 2.94 Risk-free rate 0.08 % Expected volatility 85.7 % Term (in years) 0.13 (1) Includes assumptions for the tranche settled on December 28, 2020 . In February 2021, the Company closed on the third tranche of the Series A redeemable convertible preferred stock financing, the remaining tranche liability was settled and, as such, the Company did not have any Level 3 financial instruments measured at fair value as of December 31, 2021. During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at estimated fair value using Level 3 inputs. There were no transfers within the hierarchy during the years ended December 31, 2021 and 2020. The following tables set forth the financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2021 and 2020 (in thousands): December 31, 2021 Total Fair Value Level 1 Level 2 Level 3 Assets: Money market funds (1) $ 376,976 $ 376,976 $ — $ — December 31, 2020 Total Fair Value Level 1 Level 2 Level 3 Assets: Money market funds (1) $ 19,782 $ 19,782 $ — $ — Liabilities: Redeemable convertible preferred stock tranche liability $ 29,062 $ — $ — $ 29,062 (1) Included within cash and cash equivalents on the balance sheet . The following table provides a summary of changes in the estimated fair value of Level 3 financial instruments (in thousands): Redeemable Convertible Preferred Stock Tranche Liability Balance as of December 31, 2020 $ 29,062 Change in fair value 10,341 Settlement of Series A redeemable convertible preferred stock tranche liability ( 39,403 ) Balance as of December 31, 2021 $ — 122 4. Balance Sheet Components Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets as of December 31, 2021 and 2020 consisted of the following (in thousands): December 31, 2021 December 31, 2020 Advances to suppliers $ 1,834 $ 956 Prepaid insurance 1,543 13 Other prepaid expenses 1,383 317 Total prepaid expenses and other current assets $ 4,760 $ 1,286 Property and Equipment, Net Property and equipment, net as of December 31, 2021 and 2020 consisted of the following (in thousands): December 31, 2021 December 31, 2020 Furniture and fixtures $ 3 $ — Computers and network equipment 108 24 Lab equipment 6,680 1,558 Leasehold improvements 94 Construction in progress 477 — Total property and equipment 7,362 1,582 Less: accumulated depreciation ( 855 ) ( 121 ) Total property and equipment, net $ 6,507 $ 1,461 Depreciation expense for the years ended December 31, 2021 and 2020 was $ 0.7 million and $ 0.1 million, respectively. Accrued Expenses Accrued expenses as of December 31, 2021 and 2020 consisted of the following (in thousands): December 31, 2021 December 31, 2020 Professional fees $ 186 $ 55 Early exercise liability 337 — Other accrued expenses 363 71 Total accrued expenses and other current liabilities $ 886 $ 126 123 5. Significant Agreements Stanford Exclusive License Agreement In December 2020, the Company entered into an exclusive license agreement (the “License Agreement”), with The Board of Trustees of the Leland Stanford Junior University (Stanford), pursuant to which Stanford granted us a worldwide license to specified technology and patent rights to develop, manufacture and commercialize human prophylactic and therapeutic products. Other than with respect to specified, broadly applicable assays and procedures and subject to retained rights by Stanford, the license is exclusive with respect to human prophylactic and therapeutic products for the treatment of SCD, XSCID and beta thalassemia. The license is non-exclusive with respect to those broadly applicable assays and procedures and with respect to all human prophylactic and therapeutic products other than for the treatment of SCD, XSCID and beta thalassemia. Pursuant to the License Agreement, the Company paid an upfront license fee of $ 50.0 thousand , and as additional consideration for the license, the Company agreed to issue to Stanford approximately 640,861 shares of our common stock. As of December 31, 2020, the Company recorded its obligations to issue Stanford shares of common stock at an estimated fair value of $ 2.8 million to additional paid in capital. The common shares are expected to be issued when Stanford provides the inventors’ names for allocation of the shares. Stanford also had an option to buy up to 10 % of newly issued shares in the future private financings at the price paid by other participating investors. During the year ended December 31, 2021, the Company entered into amendments to the License Agreement, pursuant to which it extended the time when the shares will be issued to May 7, 2021. On May 7, 2021, the Company issued an aggregate of 640,861 shares of the Company’s common stock to Stanford and certain individuals designated by Stanford in consideration for rights granted to the Company under the Company’s exclusive license agreement. On June 18, 2021, the Company exercised its right to repurchase an aggregate of 624,845 shares from each founder and investor under the Stanford Adjustment Repurchase Right as described below. The acquisition of the exclusive license, including patent rights and know-how, and clinical supplies was accounted for as an asset acquisition and as the acquired technology and inventories did not have an alternative use, the total consideration of $ 2.8 million was recorded as research and development expense in the statements of operations and comprehensive loss for the year ended December 31, 2020. In connection with the License Agreement, the Company reimbursed Stanford $ 0.2 million for previously incurred patent costs, which were recorded in general and administrative expenses for the year ended December 31, 2020 and, in addition, is obligated to reimburse future patent costs. During the year ended December 31, 2021, the reimbursements of patent costs to Stanford were minimal. During the year ended December 31, 2021, the Company has recognized a minimal amount in research and development expense in connection with the License Agreement The Company is also obligated to pay annual maintenance fees as follows: $ 5.0 thousand in the first year, $ 10.0 thousand in each year 2 and 3, $ 25.0 thousand in each year 3 through 6, $ 50.0 thousand each subsequent year until first commercial sale and $ 200.0 thousand each subsequent year after the first commercial sale. The Company is also obligated to make future development and regulatory milestone payments in total of up to $ 5.3 million, sales-based milestone payments of up to $ 7.5 million and royalties on future sales at percentage rates ranging in the low single digits. In addition, if the Company receives any sublicense income, it is required to share it with Stanford as a certain percentage defined for each milestone in the License Agreement. The Company will record the maintenance fees, when payable, and will record milestones when contingencies are resolved, and milestones are due. No milestones were achieved and recorded as of December 31, 2021 and 2020. The term of the License Agreement expires on the later of (a) the expiration of the last patent or abandonment of the last patent application within the license patent rights or (b) the expiration of all royalty terms with respect to Licensed Products. The Stanford License terminates on a product by product and country by country basis on the latest to occur of (i) expiration of the last valid claim of a licensed patent that covers the sale or manufacture of the applicable licensed product in such country, (ii) expiration of any period of regulatory exclusivity granted with respect to such licensed product in such country or (iii) ten years after the first commercial sale of such licensed product in a country Stanford also has a right to terminate the agreement if milestones plan is rejected by Stanford as specified in the License Agreement. In January 2021, the Company entered into an option agreement (the “First Option Agreement”), with Stanford, pursuant to which Stanford granted the Company the right to obtain a license to specified patent rights relating to human prophylactic and therapeutic products. The Company may exercise the option in whole or in part to obtain a license under one or more of the optioned patent rights. Subject to the Company’s exercise of the option under the First Option Agreement and its execution of an amendment to the License Agreement that incorporates the optioned patent rights and any optioned technology, the Company has agreed to issue to Stanford 132,137 shares of its common stock and pay a license execution fee of $ 10.0 thousand. The term of the First Option Agreement expires 18 months after its effective date, subject to the Company’s right to extend such expiration date by up to an additional one year upon notice to Stanford and by another additional one year upon the reasonable agreement 124 of Stanford. The First Option Agreement will terminate if the License Agreement terminates. As of December 31 , 2021, the Company had n ot exercised the option under the First Option Agreement and no fees have been paid for the First Option Agreement . In April 2021, the Company entered into an option agreement (the “Second Option Agreement”) with Stanford to negotiate the license for additional technologies from Stanford. Pursuant to the Second Option Agreement, the Company agreed to pay Stanford option fees in an aggregate amount of $ 30.0 thousand over the term of the option. As of December 31, 2021, the Company had not exercised the option under the Second Option Agreement and no fees have been paid for the Second Option Agreement. LCGM Service Agreement On August 30, 2021, the Company entered into a Master Manufacturing and Service Agreement with the Laboratory for Cell & Gene Medicine at Stanford (“LCGM MSA”). Pursuant to the LCGM MSA, LCGM will conduct clinical manufacturing, release testing, and product release for GPH101 in the Company’s Phase 1 clinical trial to treat SCD. During 2021, the Company entered into various SOWs under the LCGM MSA under which it received technology transfer and related services for HBB Beta-Globin Gene Variant for SCD, manufacturing engineer test runs, the exclusive use of a manufacturing suite at the LCGM facility, and Phase 1/2 clinical development and manufacturing of the HBB Variant for SCD. The Company has recognized $ 2.7 million in research and development expense in connection with the LCGM MSA as of December 31, 2021. IDT License Agreement On June 7, 2021, the Company entered into a License Agreement (“IDT License Agreement”) with Integrated DNA Technologies, Inc. (“IDT”). Pursuant to the IDT License Agreement, IDT granted the Company and its affiliates a worldwide, non-exclusive, sublicensable license to research and develop products incorporating HiFi Cas9 protein variants for use in human therapeutic applications for SCD, XSCID and Gaucher disease (the Field) and a worldwide, exclusive, sublicensable license to commercialize such products in the Field. The Company has also been granted the right to expand the licensed Field to include human therapeutic applications in the additional fields of beta thalassemia disorder and lysosomal storage disorders upon the payment of an exercise fee in the amount of $ 0.5 million per additional field or $ 1.0 million for both additional fields. In consideration of the licenses and rights granted to the Company under the IDT License Agreement, the Company agreed to pay to IDT an upfront payment in the amount of $ 3.0 million and up to $ 5.3 million (or $ 8.8 million if the Company elects to expand the Field as described above to include both the beta thalassemia and lysosomal storage disorders fields) in total regulatory milestone payments. Each regulatory milestone payment is payable once on an indication-by-indication basis. In addition, the Company has agreed to pay IDT a low single-digit royalty on the net sales of products, subject to reductions in specified circumstances. The acquisition of the license was accounted for as an asset acquisition and as the acquired technology did not have an alternative use, the total consideration of $ 3.0 million was recorded as research and development expense in the statement of operations and comprehensive loss for the year ended December 31, 2021 . The IDT License Agreement remains in effect on a country-by-country and product-by-product basis until the expiration of the royalty term for such product in such jurisdiction. The Company and IDT each have the right to terminate the IDT License Agreement for the other party’s material breach of its obligations under the IDT License Agreement, subject to specified rights to cure. Additionally, the Company may terminate the IDT License Agreement for any reason upon written notice. During the year ended December 31, 2021, the Company has recognized $ 3.0 million in research and development expense in connection with the IDT License Agreement. There are no milestones probable as of December 31, 2021; therefore, no milestone payments have been recognized in the year ended December 31, 2021. Bayside Lease On December 16, 2021, the Company entered into a lease agreement with Bayside Area Development, LLC (“Bayside”) for 85,165 square feet of office and laboratory space at 233 E Grand Avenue, South San Francisco (the “Bayside Lease Agreement”). Pursuant to the Bayside Lease Agreement, the Company is expected to commence the lease on or before September 15, 2023 with a total term of 120 months. Future minimum lease payments under the Bayside Lease Agreement total $ 81.0 million, which does not include lease payments related to the Company’s one-time option to extend for an additional ten years . As of December 31, 2021, the Company posted a security deposit in the amount of $ 1.6 million in the form of a letter of credit in connection with the Bayside Lease Agreement, which is classified as restricted cash, non-current on the balance sheet. As of December 31, 2021, there was no right-of-use asset or lease liability recorded on the balance sheet for the Bayside Lease Agreement as the Company has not yet obtained possession of the space and as the lease has not yet commenced. 6. Commitments and Contingencies Research and Development Agreements The Company enters into contracts in the normal course of business with CROs for clinical trials, with CMOS or other vendors for preclinical studies, supplies and other services and products for operating purposes. These contracts generally provide for termination 125 on notice or may have a potential termination fee if a purchase order is cancelled within a specified time. As of December 31, 20 21 and 2020, there were no amounts accrued related to termination and cancellation charges as the Company has not determined cancellation to be probable. License Agreements The Company entered into the license agreements (Note 5), pursuant to which the Company is required to pay certain cash milestones contingent upon the achievement of specific events. No such milestones were achieved or probable as of December 31, 2021 and 2020. The Company is required to pay royalties on sales of products developed under this agreement. All products are in development as of December 31, 2021 and 2020 and no such royalties were due. Legal Contingencies From time to time, the Company may become involved in legal proceedings arising from the ordinary course of business. The Company records a liability for such matters when it is probable that future losses will be incurred and that such losses can be reasonably estimated. Significant judgment by the Company is required to determine both probability and the estimated amount. Management is currently not aware of any legal matters that could have a material adverse effect on the Company’s financial position, results of operations or cash flows. Guarantees and Indemnifications In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. Its exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To the extent permitted under Delaware law, the Company has agreed to indemnify its directors and officers for certain events or occurrences while the director or officer is, or was serving, at a request in such capacity. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2021 and 2020, the Company did not have any material indemnification claims that were probable or reasonably possible and consequently has not recorded related liabilities. 7. Operating Leases Facility lease In April 2020, the Company entered into a one-year lease agreement for its headquarter facility located in South San Francisco, California with a significant portion of the premises allocated to the research lab. Due to the COVID-19 pandemic, the use of the entire facility was temporarily designated to research, and as such, all associated costs were expensed as research and development. In addition to payment of base rent, the Company is also required to pay property taxes, insurance, and common area expenses. The Company records lease expense on a straight-line basis over the term of the lease. The original term of the lease was from May 11, 2020 to June 30, 2021 with an option to renew. In March 2021, the Company entered into an amendment to the lease agreement and extended the term of the lease to September 30, 2021 . The lease expired without further renewal and was terminated on September 30, 2021. As of December 31, 2021 and December 31, 2020, the Company had a remaining obligation for the base rent related to the expired lease in the amount of $ 0.0 million and $ 0.2 million, respectively. On January 27, 2021, the Company entered into a lease agreement for office and lab space in South San Francisco, California that included two office suites. The lease terms for the two office suites commenced during July and August 2021 , respectively. The term of the lease is 44 months for the first office suite and 43 months for the second office suite with an option to extend the term for an additional two years on the same terms and conditions. This option to extend the lease term was not determined to be reasonably certain and therefore has not been included in the Company’s calculation of the associated operating lease liability under ASC 842. The corresponding right-of-use assets and lease liabilities related to the two office suites were recorded on the Company’s balance sheet upon the lease commencement date, which was the date the Company was deemed to have obtained control of the premises. On November 10, 2021 , the Company entered a sublease agreement for office and lab space located at Brisbane, California. The sublease expires on December 6, 2023 . The corresponding right-of-use assets and lease liabilities related to the sublease were recorded on the Company’s balance sheet upon the lease commencement date, which was the date the Company was deemed to have obtained control of the premises. As of January 1, 2021, the Company did not have any operating leases with terms greater than twelve months and accordingly, did not have any right-of-use assets for the lease that commenced in April 2020 recorded on its balance sheet. As of December 31, 2021, the Company had operating lease right-of-use assets of $ 6.7 million and operating lease liabilities of $ 7.2 million related to the office suite leases recorded on its balance sheet. Embedded leases The Company evaluated its vendor contracts to identify embedded leases, if any, and determined that two agreements with contract manufacturing suppliers constituted a lease under ASC 842 as the Company has the right to substantially all of the economic benefits from the use of the asset and can direct the use of the asset. 126 On May 10, 2021 and August 30, 2021, the Company and LCGM entered into the LCGM MSA and SOW #3 , respectively, for the exclusive use of a manufacturing suite at the LCGM facility. SOW #3 will expire on April 30, 2023 . Pursuant to the terms of SOW #3, LCGM agreed to provide the Company with certain dedicated space for the clinical manufacturing, release testing, and product release in the Company’s Phase 1 clinical trial to treat Sickle Cell Disease. The Company concluded that the agreement contains an embedded lease as the Company controls the use of a dedicated manufacturing suite and the equipment therein. The agreement includes fixed lease payments of $ 5.6 million through April 30, 2023. The Company and Explora BioLabs, Inc. (“Explora”) entered into a License Service Agreement and Master Services Agreement (together, the “Explora Agreements”) on November 17, 2021 and December 16, 2021, respectively. Pursuant to the terms of the Explora Agreements, Explora agreed to provide a certain dedicated space to perform in vitro or in vivo studies, obtain or house research animals, and provide scientific or technical consultation to the Company. The Company concluded that the agreement contains an embedded lease as the Company controls the use of a dedicated manufacturing suite and the equipment therein. The Explora Agreements contain fixed lease payments of $ 0.7 million through November 2023 . Operating Lease Obligations As of December 31, 2021, the current and non-current portions of the total liability for operating leases was $ 5.5 million and $ 5.8 million, respectively. As of December 31, 2021, the weighted average remaining lease term on the operating lease is 27 months. The weighted average incremental borrowing rate used to determine the operating lease liabilities included on the balance sheet was 8.4 %. As of December 31, 2021, the future minimum lease payments for the Company’s operating leases for each of the years ending December 31 were as follows (in thousands): Amount 2022 $ 6,171 2023 4,332 2024 1,468 2025 375 2026 — Thereafter — Total undiscounted lease payments 12,346 Present value adjustment ( 1,070 ) Total net lease liabilities $ 11,276 Lease expense was $ 1.9 million and $ 0.3 million for the years ended December 31, 2021 and 2020, respectively. Under the terms of the remaining lease agreements, the Company is also responsible for certain variable lease payments that are not included in the measurement of the lease liability. Variable lease payments for operating leases were $ 0.2 million for the year ended December 31, 2021, including non-lease components such as common area maintenance fees, taxes, and insurance. The following information represents supplemental disclosure for the statement of cash flows related to the operating leases (in thousands): December 31, 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows under operating leases $ 2,034 8. Redeemable Convertible Preferred Stock In June 2021, immediately prior to the completion of the Company’s IPO (Note 1), all outstanding shares of redeemable convertible preferred stock were automatically converted into 30,761,676 shares of common stock. Upon conversion into common stock, the carrying value of the redeemable convertible preferred stock of $ 260.5 million was reclassified to equity. Series A Redeemable Convertible Preferred Stock In June 2020, the Company issued 10,000,000 shares of its Series A redeemable convertible preferred stock at a price of $ 1.00 per share for gross cash proceeds of $ 10.0 million and issued 5,019,949 shares of its Series A redeemable convertible preferred stock upon the conversion of the outstanding convertible note and accrued interest. 127 In connection with the initial issuance of the shares of its Series A redeemable convertible preferred stock, the Company had an obligation to sell and the holders had the obligation to purchase the additional 30,000,000 shares of Series A redeemable convertible preferred stock at $ 1.00 per share upon the achievement of certain milestones as determined by the Board and approved by at least one of the investors, or upon the waiver of such milestones by the holders of at least 75 % of the outstanding shares of Series A redeemable convertible preferred stock, in two equal tranches of $ 15.0 million each. The Company determined that the obligation to sell additional shares is a freestanding financing instrument and a liability. The Company estimated the fair value of the liability to be $ 3.3 million and recorded it as a reduction to redeemable convertible preferred stock and as a derivative redeemable convertible preferred stock tranche liability in its balance sheet at the issuance date. In December 2020, the requisite holders waived the second tranche milestone event and the Company issued 15,000,000 shares of its Series A redeemable convertible preferred stock for gross cash proceeds of $ 15.0 million. The redeemable convertible preferred stock tranche liability related to the second tranche shares was remeasured to fair value of $ 29.1 million and reclassified to redeemable convertible preferred shares upon the settlement. In connection with the issuance of Series A redeemable convertible preferred stock, in the year ended December, 31, 2020, the Company incurred issuance costs of $ 0.2 million. As of December 31, 2020, the redeemable convertible preferred stock tranche liability related to the third tranche shares was remeasured at fair value of $ 29.1 million and continued to be reported in current liabilities. The Company settled the third tranche in February 2021 and issued 15,000,000 shares of its Series A redeemable convertible preferred stock for gross cash proceeds of $ 15.0 million. The Company recognized a total of $ 54.8 million as other loss in the statements of operations and comprehensive loss related to the changes in the fair value of the redeemable convertible preferred stock tranche liabilities during the year ended December 31, 2020. Prior to the closing of the third tranche of the Series A preferred stock financing in February 2021, the remaining tranche liability was remeasured at a fair value of $ 39.4 million. The Company recognized a loss of $ 10.3 million in the statement of operations and comprehensive loss related to the change in the fair value of the redeemable convertible preferred stock tranche liability during the year ended December 31, 2021. In connection with the closing of the third tranche of Series A redeemable convertible preferred stock, during the year ended December 31, 2021, the Company incurred issuance costs of $ 4.0 thousand. Series B Redeemable Convertible Preferred Stock In March 2021, the Company issued 29,792,487 shares of the Series B redeemable convertible preferred stock at $ 5.06 per share for gross cash proceeds of $ 150.7 million. The Company incurred issuance costs of $ 0.2 million. 9. Common Stock As of December 31, 2021 and 2020, the Company was authorized to issue 300,000,000 and 80,000,000 shares of its common stock with $ 0.00001 par value per share, respectively. Each share of the Company’s common stock is entitled to one vote . In connection with the IPO in June 2021, all outstanding shares of redeemable convertible preferred stock were converted into 30,761,676 shares of common stock. The IPO closed on June 29, 2021, pursuant to which the Company issued and sold 14,000,000 shares of its common stock at a public offering price of $ 17.00 per share. 128 On June 29, 2021, the underwriters also exercised their option to purchase an additional 2,100,000 shares of common stock at the IPO price, less the underwriting discounts and commissions. The closing of the offering of the additional shares occurred on July 2, 2021. The Company issued and sold 2,100,000 shares of its common stock at a public offering price of $ 17.00 per share. Shares Reserved for Future Issuance As of December 31, 2021 and 2020, the Company reserved common stock for future issuances as follows: December 31, 2021 December 31, 2020 Series A redeemable convertible preferred stock — 12,343,727 Outstanding stock option awards 5,056,743 306,739 Shares available for future stock option grants 4,454,004 2,064,221 ESPP shares available for future grants 524,106 — Total shares reserved for future issuance 10,034,853 14,714,687 Founders’ and Investor’s Restricted Common Stock In March 2020 the Board approved and in April 2020, the Company issued 6,081,413 shares of its common stock to its founders and 2,467,104 shares of its common stock to its investor at the purchase price of $ 0.00002 per share. As of December 31, 2020, the investor’s shares were fully vested and a portion of the shares issued were subject to the Company’s option to repurchase per the Stanford Adjustment Repurchase Right, as described below. The shares of the Company’s common stock issued to its founders for their advisory and consulting services vest monthly over four years with one year cliff from the vesting commencement date. The vesting commencement date was the date of the initial closing of the Series A preferred stock financing or June 24, 2020. Per the Series A agreement, the vesting of the founders’ common stock shares could be accelerated upon signing of term-sheet for the license with Stanford, a change in control, or if the service is terminated by the Company without cause. The Company signed the term sheet with Stanford in June 2020 and as a result 912,212 shares of founders’ common stock vested pursuant to the acceleration terms. If a founder terminates the relationship with the Company during the vesting period, the Company may repurchase any unvested restricted common stock at the price per share equal to the lower of (i) the original purchase price, subject to adjustment in the event of any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or (ii) the current fair market value as of the date the Company elects to exercise this repurchase. The repurchase right lapses in 180 days after the termination of the founder’s service or employment. During the vesting term, holders of founders’ common stock awards are deemed to be common stockholders and have the right to receive dividends and voting rights. The founders’ shares of common stock are also subject to the Company’s option to repurchase per the Stanford Adjustment Repurchase Right, as described below. The Company accounts for shares issued to founders as equity compensation awards and the estimated fair value at the grant date was minimal. 3,230,746 and 5,169,202 shares of founders’ common stock awards were unvested and expected to vest in 2.5 years and 3.5 years as of December 31, 2021 and 2020, respectively. Stanford Adjustment Repurchase Right Upon the issuance of shares of common stock to Stanford pursuant to the License Agreement, as discussed in Note 5, the Company has a right to repurchase from each founder and an investor a number of shares of common stock equal to the number of shares issued to Stanford multiplied the applicable number of shares issued to the founder or investor, as applicable, divided by 7,273,848 shares (a fully diluted number of shares of the Company at the end of March 2020, after founders and the investor’s shares were approved by the board of directors). The Stanford Adjustment Repurchase Right may be exercised by the Company within six months following the date of the issuance of the shares of common stock to Stanford. The repurchase price per share is equal to the lower of (i) the purchase price, subject to adjustment in the event of any reorganization, recapitalization, reclassification, etc., or (ii) the current fair market value as of the date the Company elects to exercise its Stanford Adjustment Repurchase Right. On May 7, 2021, the Company issued an aggregate of 640,861 shares of the Company’s common stock to Stanford and certain individuals designated by Stanford in consideration for rights granted to the Company under the Company’s exclusive license agreement. On June 18, 2021, the Company exercised its right to repurchase an aggregate of 624,845 shares from each founder and investor under the Stanford Adjustment Repurchase Right. As of December 31, 2021, the Company has not exercised the right to purchase the remaining 16,016 shares. The Company accounts for the founders and investor’s shares of restricted common stock as equity share-based awards. 129 10. Equity Incentive Plans 2020 Stock Option and Grant Plan The Company grants share-based awards under the 2020 Stock Option Plan, as amended (the “2020 Plan”). The Company may grant under the 2020 Plan incentive stock options, nonqualified stock options, restricted stock awards, restricted stock units and other share-based awards to the Company’s officers, employees, directors and consultants. Options under the 2020 Plan may be granted for periods of up to 10 years and at prices no less than 100.0 % of the estimated fair value of the shares on the date of grant as determined by the Board, provided, however, that the exercise price of an incentive stock option granted to a 10.0 % stockholder shall not be less than 110.0 % of the estimated fair value of the shares on the date of grant and the option is not exercisable after the expiration of five years from the date of grant. Options generally vest monthly over four years with or without one year cliff vesting. Per the 2020 Plan, granted options maybe early exercised prior to vesting and the Company will issue shares of restricted stock upon the early exercise with vesting terms consistent with the original grant. Upon completion of the Company’s IPO, the remaining shares available for issuance under the 2020 Plan were retired. 2021 Stock Option and Grant Plan In June 2021, the Company’s Board of Directors approved the 2021 Stock Option and Incentive Plan (the “2021 Plan”) that became effective immediately prior to the date when the Company’s prospectus was declared effective by the SEC on June 24, 2021. The Company will initially reserve 5,636,000 shares of common stock for issuance of awards under the 2021 Plan. The 2021 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2022, by 5 % of the outstanding number of shares of our common stock on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee. The option exercise price of each option will be determined by our compensation committee but generally may not be less than 100 % of the fair market value of the Company’s common stock on the date of grant. The term of each option will be fixed by the Company’s compensation committee and may not exceed ten years from the date of grant. The grant date fair value of all awards made under the 2021 Plan and all other cash compensation paid by the Company to any non-employee director for services as a non-employee director in any calendar year may not exceed $ 1.0 million for the first year of service and $ 750.0 thousand for each year of service thereafter. The table below presents a summary of activities and a reconciliation of shares of common stock remaining for grant under the 2020 Plan and 2021 Plan during the years ended December 31, 2021 and 2020: December 31, 2021 December 31, 2020 Shares authorized under 2020 and 2021 Plans 5,636,000 4,101,545 Options granted ( 1,320,592 ) ( 1,204,341 ) Options early exercised and repurchased 138,596 — Restricted stock awards granted — ( 832,983 ) Remaining shares available for grant 4,454,004 2,064,221 Restricted Stock Awards During the year ended December 31, 2020, the Company issued 832,983 shares as restricted stock awards under the 2020 Plan. The purchase price of the restricted common stock awards was fair value as determined by the Board at the issuance date. The shares vest monthly over four years with the one-year cliff vesting from the grant date. Upon termination of employment, the Company has the right to repurchase any unvested restricted shares. The repurchase price for unvested shares of common stock will be the lower of (i) the fair market value on the date of repurchase or (ii) their original purchase price. There were no shares issued during the year ended December 31, 2021. The Company accounted for restricted stock awards as early exercised options and recognized a liability in other liabilities when cash was received for the purchase of shares of restricted stock awards. As shares of restricted stock awards vest, the Company reclassified the liability to common stock and additional paid in capital. As of December 31, 2021 and 2020, the Company recorded a minimal liability for restricted stock awards included in accrued expenses and other current liabilities. Awards granted during the year ended December 31, 2020 had an estimated weighted average grant date fair value per share of $ 0.05 and the total fair value of such awards was $ 36.0 thousand. No restricted stock awards were cancelled or repurchased during the years ended December 31, 2021 and 2020. There were 345,966 and no shares of restricted stock vested as of December 31, 2021 and 2020, respectively. Employee Stock Purchase Plan In June 2021, the Company’s board of directors and stockholders approved the 2021 Employee Stock Purchase Plan (the “2021 ESPP”) which became effective upon the IPO. The 2021 ESPP is intended to qualify as an employee stock purchase plan under 130 Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the Company’s board of directors and the Compensation Committee of the board of directors. Under the 2021 ESPP , 564,000 shares of the Company’s common stock have been initially reserved for employee purchases of the Company’s common stock. The 2021 ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 % of their eligible compensation. At the end of each offering period, employees are able to purchase shares at 85 % of the lower of the fair market value of the Company’s common stock at the beginning of the offering period or at the end of each applicable purchase period. The first purchase period commenced upon the completion of the Company’s IPO and ended on November 30, 2021 upon which 39,894 shares were issued. The second purchase period commenced on December 1, 2021 and will end on May 31, 2022. The Company recorded $ 0.1 million in accrued liabilities as of December 31, 2021 . Year Ended December 31, 2021 Expected volatility 72.00% - 74.00% Expected dividend yield 0.00 % Expected term (in years) 0.44 - 0.5 Risk-free interest rate 0.10% - 1.00% Incentive Stock Options and Nonqualified Stock Options Stock options issued under the 2020 Plan, generally, vest over a four-year period and expire ten years from the date of grant. Certain options provide for accelerated vesting if there is a change in control, as defined in the individual award agreements. The Company used the Black-Scholes option pricing model to estimate stock-based compensation expense for stock option awards granted during the periods presented, with the following assumptions. Year Ended December 31, Year Ended December 31, 2021 2020 Expected volatility 72.00% - 77.74% 77.91% - 79.18% Expected dividend yield 0 % 0 % Expected term (in years) 5.48 - 6.04 5.91 - 6.07 Risk-free interest rate 0.56% - 1.34% 0.37% - 0.53% 131 A summary of option activity under the 2020 Plan and the 2021 Plan during the year ended December 31, 2021 is as follows: Number of Options Weighted- Average Exercise Price Per Share Weighted- Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2020 306,739 $ 0.29 9.9 $ 1,365 Options granted - 2020 Plan 4,986,847 $ 5.39 Options exercised ( 952,731 ) $ 0.33 Options granted - 2021 Plan 1,320,592 $ 16.15 Options cancelled ( 604,704 ) $ 5.99 Outstanding as of December 31, 2021 5,056,743 $ 8.77 9.2 $ 18,503 Exercisable 563,228 $ 5.11 7.9 $ 4,126 Vested and expected to vest as of December 31, 2021 5,056,743 $ 8.77 9.2 $ 18,503 Aggregate intrinsic value represents the difference between the fair value of the underlying common stock and the exercise price as of December 31, 2021. The weighted-average grant date fair value of options granted during the year ended December 31, 2021 is $ 6.13 per share. The intrinsic value of the stock options exercised was $ 5.0 and $ 2.8 million for the years ended December 31, 2021 and 2020. Early Exercise of Stock Options The terms of the 2020 Plan permit the exercise of options granted prior to vesting, subject to required approvals. The unvested shares are subject to the repurchase right upon termination of employment at the original purchase price. The repurchase right lapses in 180 days after the termination of the employee’s employment. Shares purchased by employees pursuant to the early exercise of stock options are not deemed, for accounting purposes, to be issued until those shares vest according to their respective vesting schedules. Cash received for early exercised stock options is recorded as other liabilities on the balance sheet and is reclassified to common stock and additional paid-in capital as such shares vest. During the year ended December 31, 2021, the Company repurchased 138,596 shares that were previously early exercised. At December 31, 2021 and 2020, 1,195,631 and 865,129 shares remained subject to the right of repurchase as a result of the early exercised stock options. The remaining liability related to early exercised shares as of December 31, 2021 and 2020 was $ 0.3 million and $ 0.3 million and was recorded in accrued expenses and other current liabilities and other liabilities, respectively, in the balance sheet. Stock-Based Compensation Expense The following table presents the components of stock-based compensation expense for the Company’s stock-based awards for the year ended December 31, 2021 (in thousands): Year Ended December 31, 2021 2020 Restricted stock awards and founders’ common stock awards $ 9 $ 6 ESPP 215 — Stock options 7,647 171 Total stock-based compensation expense $ 7,871 $ 177 The above stock-based compensation expense also includes the expenses of $ 0.3 million and $ 0.0 million related to stock options issued to non-employees during the years ended December 31, 2021 and 2020, respectively. 132 The following table presents the classification of stock-based compensation expense for the Company’s stock-based awards for the year ended December 31, 2021 (in thousands): Year Ended December 31, 2021 2020 Research and development expenses $ 2,685 $ 123 General and administrative expenses 5,186 54 Total stock-based compensation expense $ 7,871 $ 177 As of December 31, 2021 and 2020, there was $ 30.5 million and $ 2.9 million of unrecognized stock-based compensation expense related to the employee and non-employee awards, which is expected to be recognized over a weighted-average period of 3.3 years and 3.7 years, respectively. 11. Net Loss Per Share Attributable to Common Stockholders The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders, which excludes shares which are legally outstanding, but subject to repurchase by the Company (in thousands, except share and per share amounts): Year Ended December 31, 2021 2020 Numerator: Net loss $ ( 70,760 ) $ ( 68,373 ) Denominator: Weighted-average common shares outstanding 35,121,114 7,003,742 Less: weighted-average unvested restricted shares and shares subject to repurchase ( 6,201,859 ) ( 4,719,655 ) Weighted-average shares used to compute basic and diluted net loss per share attributable to common stockholders 28,919,255 2,284,087 Net loss per share attributable to common stockholders— basic and diluted: $ ( 2.45 ) $ ( 29.93 ) Anti-dilutive Outstanding Shares or Equivalents The following outstanding options, unvested shares, and ESPP shares were excluded (as common stock equivalents) from the computation of diluted net loss per common share for the periods presented as their effect would have been antidilutive (in thousands): Year Ended December 31, 2021 2020 Redeemable convertible preferred stock — 12,343,727 Options to purchase common stock 5,056,743 306,739 Common stock subject to vesting or repurchase 4,774,798 6,002,187 Employee Stock Purchase Plan shares 99,252 — Total 9,930,793 18,652,653 133 12. Related Party Transactions Related Party Convertible Notes and Expenses Reimbursement In June 2017, the Company issued a convertible promissory note (the “2017 Note”) to its sole investor, Versant, for $ 2.0 million with 4 % annual interest rate payable upon maturity in December 2018. The outstanding principal amount of the 2017 Note and any unpaid accrued interest were automatically convertible into preferred shares sold in a qualified financing, as defined in the agreement at a conversion price equal to the lesser of: 80 % of the purchase price paid per preferred share, and $ 5.0 million divided by the aggregate number of the Company’s fully diluted equity immediately prior to the closing of the qualified financing. The Company could not prepay the 2017 Note without the consent of the holder. In an event of change of control, the holder could, at the option of the holder and upon written notice to the Company, elect to convert the principal and accrued interest as of the date of such election (if not previously converted or repaid) into number of shares of the Company’s common shares at the conversion price equal to $ 3.0 million divided by the aggregate number of the Company’s fully diluted equity immediately prior to the date of such election. On the maturity date, the holder could, at the option of the holder and upon a written notice to the Company, elect to convert the principal and accrued interest into number of shares of a newly designated series of the Company’s preferred shares (at the conversion price equal to $ 3.0 million divided by the aggregate number of the Company’s fully diluted equity prior to the maturity date. Upon an event of default, as defined in the agreement, at the option and upon the declaration of the holder and upon written notice to the Company, all principal and unpaid accrued interest would become due and payable. In April 2020, the 2017 Note principal of $ 2.0 million and the related interest of $ 0.3 million were outstanding and in default, but were forgiven and recorded to additional paid in capital as a related investor note forgiveness. The Company accounted for the forgiveness as a debt extinguishment. The estimated fair values of the embedded share-settlement put option and default options were minimal as of the cancellation date. In March 2020, the Company issued a new convertible promissory note (the “2020 Note”) for $ 5.0 million to the same investor with an interest rate of 1.6 % per annum payable at maturity in March 2021 . The outstanding principal amount of the 2020 Note and any unpaid accrued interest were automatically convertible into the Company’s preferred shares sold in a qualified financing, as defined in the agreement, into that number of preferred shares sold in such qualified financing as is equal to the quotient of (i) the conversion amount (note principal and accrued interest) divided by (ii) the per share price at which the preferred shares are sold in such qualified financing and on such other terms and conditions provided to investors in the qualified financing. The Company could not prepay the note without the consent of the holder. In an event of change of control, the holder could, at the option of the holder and upon written notice to the Company, elect to convert the principal and accrued interest as of the date of such election (if not previously converted or repaid) into number of shares of the Company’s common shares at the conversion price equal to $ 31.7 million divided by the aggregate number of the Company’s fully diluted equity immediately prior to the date of such election. On the maturity date, the holder could, at the option of the holder and upon a written notice to the Company, elect to convert the principal and accrued interest into number of shares of a newly designated series of the Company’s preferred shares (at the conversion price equal to $ 31.7 million divided by the aggregate number of the Company’s fully diluted equity prior to the maturity date. Upon an event of default, as defined in the agreement, at the option and upon the declaration of the holder and upon written notice to the Company, all principal and unpaid accrued interest would become due and payable. The principal and accrued interest of the 2020 Note were converted to 5,019,945 shares of the Company’s Series A redeemable convertible preferred stock in June 2020, per its embedded share-settlement put option provision. Issued preferred shares were recorded at fair value at the issuance date, and there was no extinguishment gain or loss recorded on the conversion. Refer to Note 8 for more details on the Series A redeemable convertible preferred stock. 134 13. Income Taxes No provision for income taxes was recorded for the years ended December 31, 2021 and 2020. The Company has incurred net operating losses only in the United States since its inception. The Company has not reflected any benefit of such net operating loss carryforwards in the financial statements. A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate was as follows: Year Ended December 31, 2021 2020 Federal statutory income tax rate ate 21.00 % 21.00 % State taxes 1.94 0.17 Others ( 0.26 ) ( 0.13 ) Research and development credits 1.01 ( 0.05 ) Cancellation of debt income - ( 0.61 ) Tranche liability ( 3.06 ) ( 16.84 ) Interest expense - ( 0.01 ) Stock-based compensation ( 0.96 ) - Change in valuation allowance ( 19.67 ) ( 3.53 ) Provision for taxes 0.00 % 0.00 % Net deferred tax assets and liabilities consisted of the following (in thousands): December 31 2021 2020 Deferred tax assets: Net operating losses - non-current $ 12,006 $ 2,269 General business credit - non-current 2,682 81 Operating lease right-of-use assets 2,368 — Stock based compensation 784 — Accruals and reserves 525 105 Fixed assets 396 — Other 2 — Gross deferred tax assets 18,763 2,455 Valuation allowance ( 16,332 ) ( 2,414 ) Net deferred tax assets 2,431 41 Fixed asset basis — ( 41 ) Operating lease liabilities ( 2,431 ) — Other — — Gross deferred tax liabilities ( 2,431 ) ( 41 ) Net deferred tax assets $ — $ — Net operating losses and tax credit carryforwards were as follows as of December 31, 2021 (dollars in thousands): Year Ended December 31, 2021 Amount Expiration Years Net operating losses, federal (starting from January 1, 2018) $ 57,163 Do Not Expire Net operating losses, state 29 12/31/2039 Tax credits, federal 2,304 12/31/2041 Tax credits, state 1,886 Do Not Expire 135 Utilization of the net operating loss carryforwards and research credit carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code, as amended, (“IRC”), and similar state provisions. Annual limitations may result in the expiration of the net operating losses and tax credit carryforwards before they are utilized. The Company did not perform an IRC Section 382 analysis and any previous ownership changes may result in a limitation that will reduce the total amount of net operating loss and tax credit carryforwards disclosed that can be utilized. Subsequent ownership changes may affect the limitation in future years. During the years ended December 31, 2021 and 2020, the Company recorded a full valuation allowance on federal and state deferred balances since management does not forecast the Company to be in a profitable position in the near future. Changes in the valuation allowance for deferred tax assets during the years ended December 31, 2021 and 2020 related primarily to the increases in net operating loss carryforwards and research and development tax credit carryforwards and were as follows (in thousands): Year Ended December 31, 2021 2020 Valuation allowance at the beginning of the year $ 2,414 $ 8 Increases recorded to income tax provision 13,918 2,406 Valuation allowance at the end of the year $ 16,332 $ 2,414 The Company’s U.S. federal and state income tax returns are generally subject to tax examinations for the tax years from inception through December 31, 2020. There are currently no pending income tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): December 31, 2021 2020 Balance at beginning of year $ — $ — Additions based on tax positions related to current year 1,258 — Increased for prior period positions 149 — Unrecognized tax benefit—December 31 $ 1,407 $ — The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. The Company has elected to include interest and penalties as a component of tax expense. During the years ended December 31, 2021 and 2020, the Company did no t recognize accrued interest and penalties related to unrecognized tax benefits. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or decrease during the next 12 months. 14. Subsequent Events The Company has evaluated all subsequent events that occurred after the date of the accompanying financial statements and determined that there were no events or transactions during this subsequent event reporting period which require recognition or disclosure in our financial statements. 136 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.