LENZ Therapeutics, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of LENZ’ consolidated results of operations and financial condition. The discussion should be read together with the condensed consolidated financial statements and the accompanying notes to those statements that are included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements for the year ended December 31, 2023 and the related notes included in the Company’s Current Report on Form 8-K filed with the SEC on March 22, 2024. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. LENZ’s actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” as set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. Unless otherwise indicated or the context otherwise requires, references in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section to “LENZ OpCo,” “LENZ,” “the Company,” “we,” “us,” “our” and other similar terms refer to the business and operations of LENZ OpCo prior to the Merger and to LENZ and its consolidated subsidiary following the Merger. While the legal acquirer in the Merger was Graphite, for financial accounting and reporting purposes under GAAP, LENZ OpCo was the accounting acquirer and the Merger was accounted for as a “reverse recapitalization.” A reverse recapitalization (i.e., a capital transaction involving the issuance of stock by Graphite for LENZ OpCo’s stock) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of LENZ OpCo in many respects. Accordingly, the consolidated assets, liabilities and results of operations of LENZ OpCo became the historical consolidated financial statements of the combined company, and Graphite’s assets, liabilities and results of operations were consolidated with those of LENZ OpCo beginning on the acquisition date. Operations prior to the Merger will be presented as those of LENZ OpCo in future reports. Graphite’s assets and liabilities were measured and recognized at their fair values as of the closing of the Merger. Overview We are a late-stage biopharmaceutical company focused on developing and commercializing innovative therapies to improve vision. Our initial focus is the treatment of presbyopia, the inevitable loss of near vision that impacts the daily lives of nearly all people over 45. In the United States, the estimated addressable population who suffer from this condition, known as presbyopes, is 128 million, almost four times the number of individuals suffering from dry eye disease and three times the number of individuals suffering from childhood myopia, macular degeneration, diabetic retinopathy and glaucoma combined. We believe that a once-daily pharmacological eye drop that can effectively and safely improve near vision throughout the full workday, without the need for reading glasses, could be a highly attractive commercial product with an estimated U.S. market opportunity in excess of $3 billion. It is our goal to develop and commercialize such a product, and we have assembled an executive team with extensive clinical and commercial experience to execute this goal and become the category leader. Our lead product candidate LNZ100 is a preservative-free, single-use, once-daily eye drop containing aceclidine. We believe our product candidate is differentiated based on rapid onset, degree and duration of near vision improvement, its ability to be used across the full age range of presbyopes, from their mid-40s to well into their mid-70s, as well as a broad refractive range. Aceclidine’s pupil-selective mechanism of action was demonstrated in our clinical trials where near vision improved while avoiding blurry distance vision. Our product candidate was well-tolerated in clinical trials, and its active ingredient aceclidine has a favorable tolerability profile that have been well-established empirically. LNZ100 has patent protection until 2039 in the United States, at a minimum, due to a robust intellectual property portfolio underpinned by issued patents. In the safety and efficacy trials (“CLARITY 1 and 2”) of our Phase 3 study, LNZ100 achieved the primary endpoints and key secondary endpoints, with statistically significant three-lines or greater improvement in Best Corrected Distance Visual Acuity (“BCDVA”) at near, without losing one or more lines in distance visual acuity. In the vehicle-controlled CLARITY 2 trial, the day 1 results showed (all p<0.0001): • Rapid onset : 71% achieved three-lines or greater improvement at 30 minutes. • Primary endpoint : 71% achieved three-lines or greater improvement at 3 hours. • Long duration : 40% achieved three-lines or greater improvement at 10 hours. 21 Table of Contents Near vision improvement was reproducible and consistent across both CLARITY 1 and 2 throughout the four-week study periods. LNZ100 was well-tolerated with no serious treatment-related adverse events observed in the over 30,000 treatment days including the six-week safety study period in CLARITY 1 and 2 and the six-month period in the CLARITY 3 Phase 3 long-term safety trial (collectively, the “CLARITY study”). Our other product candidate LNZ101, a preservative-free eye drop containing aceclidine and brimonidine, showed similar results, including achieving primary and secondary endpoints in both CLARITY 1 and 2, but did not show superiority to LNZ100. Based on these results, we selected LNZ100 as our lead product candidate, for which we submitted a New Drug Application (“NDA”) to FDA in August 2024 with a potential approval in mid-2025 and launch target date in the second half of 2025. We believe that LNZ100, if approved, could be the first and only aceclidine-based product approved by the FDA and would then be eligible for five years of new chemical entity (“NCE”) exclusivity in the United States. As of June 30, 2024 , we had $196.1 million of cash, cash equivalents and marketable secu rities. We believe that our existing cash, cash equivalents and marketable securities as of June 30, 2024, together with the net proceeds of the July 2024 PIPE Financing, will allow us to continue to build infrastructure and commercialize LNZ100, subject to FDA approval, and will be sufficient to fund the Company to positive operating cash flow subsequent to such commercial launch. We do not expect to generate any revenues from product sales unless and until we suc cessfully obtain regulatory approval for LNZ100 . We have incurred net losses in each year since inception, and as of June 30, 2024 , we had an accumulated deficit of $122.1 million . These losses have resulted principally from costs incurred in connection with research and development activities and selling, general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses as we seek FDA approval and begin commercialization. These costs include expenses associated with the regulatory approval process and, subject to such approval, preparation for the potential commercial launch of LNZ100, subject to FDA approval. Additionally, we anticipate incurring expenses related to product sales, marketing, manufacturing, and distribution, and additional costs associated with being a public company, including audit, legal, regulatory and tax-related services associated with maintaining compliance with an exchange listing and SEC requirements. As a result of these and other factors, it is possible that we may require additional financing to fund our operations and planned growth. Through the completion of the Merger, L ENZ OpCo financed its operations primarily through private placements of its common stock and convertible preferred stock. Concurrent with the closing of the Merger on March 21, 2024, the Company completed the March 2024 PIPE Financing of 3,559,565 shares of common stock for an aggregate gross purchase price of $53.5 million. Additionally, on July 17, 2024, the Company completed a private placement (the "July 2024 PIPE Financing") with Ridgeback Capital Investment, L.P. of 1,578,947 shares of common stock for an aggregate gross purchase price of $30.0 million. If we are unsuccessful in generating sufficient revenue and operating cash flow from sales of LNZ100 , if ever, we may be required to finance our cash needs through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements if and when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. Ji Xing License and Collaboration Agreement In April 2022, we entered into a License and Collaboration Agreement with Ji Xing Pharmaceuticals Hong Kong Limited (“Ji Xing”) granting Ji Xing an exclusive license (the “Ji Xing License”) to certain of our intellectual property rights to develop, use, import, and sell products containing LNZ100 or LNZ101 (“Products”) for the treatment of presbyopia in humans in mainland China, Hong Kong Special Administrative Region, Macau Special Administrative Region, and Taiwan (collectively, “Greater China”). We also granted Ji Xing (i) the right to negotiate in good faith and enter into agreements to purchase Products from us for clinical and commercial uses at cost plus a negotiated percentage and (ii) the right of first negotiation to obtain a regional license from us on other products we might develop outside of the field of presbyopia for commercialization in Greater China. We received nonrefundable, non-creditable upfront payments totaling $15.0 million as initial consideration under the Ji Xing License during the year ended December 31, 2022. In addition, we are also eligible to receive (i) up to $95.0 million in regulatory and sales milestone payments, (ii) tiered, escalating royalties in the range of 5% to 15% on net sales of Products in Greater China by Ji Xing, its affiliates and sublicensees, and (iii) tiered, deescalating royalties in the range of 22 Table of Contents 15% to 5% of sublicensing income received by Ji Xing prior to the regulatory approval of the first Product in Greater China. The $15.0 million upfront payments allocated to that single performance obligation was recognized on execution of the Ji Xing License during the year ended December 31, 2022. No contractual milestones were met under the Ji Xing License during the six months ended June 30, 2024 or 2023. Key Trends and Factors Affecting Comparability Between Periods • Our research and development costs decreased during the three and six months ended June 30, 2024, relative to the three and six months ended June 30, 2023, primarily as a result of reduced contract manufacturing expenses and clinical research expenses related to the substantial completion of our Phase 3 CLARITY trials in March 2024. We expect our research and development costs will continue to decrease in 2024, relative to 2023, given the completion of the CLARITY trials and subsequent wind-down over 2024. • We expect that selling, general and administrative expenses will continue to increase in 2024, relative to 2023, as we expand our operating activities and number of employees in connection with a potential commercial launch of LNZ100, subject to FDA approval. • We have built a cross-functional commercial team consisting of marketing and commercial operations and will continue to strategically build our sales and commercial infrastructure with capabilities designed to scale when necessary to support a commercial launch if approval is received. These expenses increased during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, and we expect such expenses to continue to increase for the foreseeable future, in connection with our shift in focus towards a potential commercial launch of LNZ100, subject to FDA approval. • As a result of the Merger, the Company’s corporate general and administrative expenses have and will continue to increase from those that we incurred in prior years as a privately held company, including costs related to (i) compliance with the rules and regulations of the SEC and those of Nasdaq, (ii) legal, accounting and other professional services, (iii) insurance, (iv) investor relations activities, and (v) other administrative and professional services. Recent Developments Phase 3 CLARITY Capstone Data and Key Opinion Leader Event In June 2024, LENZ hosted a Key Opinion Leader ("KOL") event, highlighting capstone data from the Phase 3 CLARITY study, featuring real-world perspectives from lead investigators and prominent KOLs on the current treatment landscape for presbyopia and their perspectives on LNZ100 data from the Phase 3 CLARITY study. The capstone data results from the CLARITY Phase 3 study highlighted: • Robust Product Profile: Patients treated with LNZ100 achieved near universal response with rapid onset and long duration, highlighting a potential best-in-class product profile. • Rapid onset: At 30 minutes, LNZ100 reported 71% and 91% of participants achieved three- and two-lines or greater improvement in CLARITY 2, respectively. • Primary Endpoint Achievement (3 Hours): LNZ100 reported 71% and 91% of participants achieved three- and two-lines or greater improvement in CLARITY 2, respectively. • Long duration: At 10 hours, LNZ100 reported 40% and 69% of participants achieved three-and two-lines or greater improvement in CLARITY 2, respectively. • Beyond 3-lines of improvement was observed: LNZ100 reported 84% of participants achieving at least 4 lines and 52% at least 5 lines of near vision improvement. • Statistically significant improvement in distance vision: 41% of participants achieved 1-line or more of distance vision improvement. • Safety profile: LNZ100 was well-tolerated, with no serious treatment-related adverse events reported in over 30,000 patient treatment days. 23 Table of Contents Private Placement On July 14, 2024, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) for the July 2024 PIPE Financing. Pursuant to the Purchase Agreement, the Company agreed to sell 1,578,947 shares of the Company’s common stock at a purchase price of $19.00 per share. The gross proceeds of the July 2024 PIPE Financing were $30.0 million. The July 2024 PIPE Financing closed on July 17, 2024. Basis of Presentation The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the balance sheets and statements of operations and comprehensive loss presented herein. The following discussion and analysis are based on our audited financial statements and related notes thereto, which we have prepared in accordance with GAAP. You should read the discussion and analysis together with such audited financial statements and the related notes thereto. Components of Statements of Operations and Comprehensive Loss Operating Expenses Research and Development Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred. Research and development expenses consist primarily of: (i) employee related costs, including salaries, benefits and share-based compensation expense for employees engaged in research and development activities; (ii) third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities; (iii) external costs of outside consultants who assist with technology development, regulatory affairs, clinical development and quality assurance; and (iv) allocated facility-related costs. Costs for certain activities, such as manufacturing, nonclinical studies and clinical trials are generally recognized based on the evaluation of the progress of completion of specific tasks using information and data provided by our vendors and collaborators. Research and development activities are central to our business. Selling, General and Administrative Selling, general and administrative expenses consist primarily of salaries and related benefits, including share-based compensation, related to our executive, finance, business development, sales and marketing, human resources, and other corporate functions. Other selling, general and administrative expenses include professional fees for legal, auditing, tax and business consulting services, marketing and advertising costs, insurance costs, intellectual property and patent costs, facility costs and travel costs. Other Income (Expense), Net Other income (expense), net consists of the change in fair value of preferred stock warrants liability, interest income earned on cash, cash equivalents, and short-term investments, and changes in the fair value of long-term investments due to observable price changes in orderly transactions for an identical or similar investment. Upon completion of the Merger, the preferred stock warrants became exercisable into shares of common stock and will no longer continue to be remeasured at each reporting date. Results of Operations Comparison of the Three Months Ended June 30, 2024 and 2023 The following table presents the results of operations for the periods indicated (amounts in thousands, except percentages): Three Months Ended June 30, 2024 2023 $ Change % Change Research and development $ 6,945 $ 12,639 $ (5,694) (45) % Selling, general and administrative 7,407 2,320 5,087 219 % Other income (expense), net 4,098 233 3,865 1659 % 24 Table of Contents Research and Development Substantially all of our research and development expenses incurred for the three months ended June 30, 2024 and 2023 were related to the development of LNZ100 in our INSIGHT and CLARITY trials. Research and development expenses decreased by $5.7 million, or 45%, from $12.6 million for the three months ended June 30, 2023 to $6.9 million for the three months ended June 30, 2024. The decrease was primarily driven by a $9.2 million decrease in contract research expense for our clinical trials, as our Phase 3 CLARITY trials were substantially completed in March 2024, offset by a $1.0 million increase in nonclinical research expense, a $0.9 million increase in employee salaries and related expenses due to increased headcount, a $0.8 million increase in contract manufacturing expenses for clinical drug product manufacturing, and a $0.8 million increase in contract regulatory consulting expenses. Selling, General and Administrative Selling, general and administrative expenses increased $5.1 million, or 219%, from $2.3 million for the three months ended June 30, 2023 to $7.4 million for the three months ended June 30, 2024. The increase was primarily driven by a $1.9 million increase in employee salaries and related expenses due to increased headcount, a $1.2 million increase in marketing and advertising expenses as we increase our pre-commercial planning initiatives for a potential commercial launch of LNZ100, subject to FDA approval, and a $1.1 million increase in legal and other professional services. Other Income (Expense), net Other income, net for the three months ended June 30, 2024, was $4.1 million, compared to $0.2 million for the three months ended June 30, 2023. The change was primarily driven by an increase in interest income of $2.2 million due to the increase in cash equivalents and marketable securities acquired in the Merger, and an increase of $1.3 million due to changes in the fair value of the Company's equity investment without a readily determinable fair value. Comparison of the Six Months Ended June 30, 2024 and 2023 The following table presents the results of operations for the periods indicated (amounts in thousands, except percentages): Six Months Ended June 30, 2024 2023 $ Change % Change Research and development $ 17,482 $ 22,964 $ (5,482) (24) % Selling, general and administrative 12,958 4,611 8,347 181 % Other income (expense), net 3,538 179 3,359 1877 % Research and Development Substantially all of our research and development expenses incurred for the six months ended June 30, 2024 and 2023 were related to the development of LNZ100 in our INSIGHT and CLARITY trials. Research and development expenses decreased $5.5 million, or 24%, from $23.0 million for the six months ended June 30, 2023 to $17.5 million for the six months ended June 30, 2024. The decrease was primarily driven by a $10.1 million decrease in contract research expense for our clinical trials, as our Phase 3 CLARITY trials were substantially completed in March 2024, partially offset by a $1.8 million increase in employee salaries and related expenses due to increased headcount, a $1.7 million increase in nonclinical research expense, and a $1.4 million increase in contract regulatory consulting expenses as we prepared to submit the NDA filing for LNZ100. Selling, General and Administrative Selling, general and administrative expenses increased $8.3 million, or 181%, from $4.6 million for the six months ended June 30, 2023 to $13.0 million for the six months ended June 30, 2024. The increase was primarily driven by a $2.6 million increase in legal and other professional services, a $2.5 million increase in employee salaries and related expenses due to increased headcount (including a one-time, non-cash stock-based compensation charge of $0.3 million for the acceleration of vesting of stock options as a result of the Merger), a $1.9 million increase in marketing and advertising expenses as we increase our pre-commercial planning initiatives for a potential commercial launch of LNZ100, subject to FDA approval, and a $1.0 million increase in other general and administrative expenses. 25 Table of Contents Other Income (Expense), net Other income, net for the six months ended June 30, 2024, was $3.5 million, compared to $0.2 million for the six months ended June 30, 2023. The change was primarily driven by an increase of $3.0 million in interest income due to the increase in cash equivalents and marketable securities acquired in the Merger, and an increase of $1.3 million in the fair value of the Company's equity investment without a readily determinable fair value, partially offset by a $1.0 million increase in the fair value of the preferred stock warrants liability, resulting in a non-recurring, non-cash charge at the close of the Merger. Liquidity and Capital Resources Sources of Liquidity As of June 30, 2024, we had $196.1 million of cash, cash equivalents and marketable securities. We have incurred net losses in each year since inception and as of June 30, 2024, we had an accumulated deficit of $122.1 million. Our net losses were $10.3 million and $14.7 million for the three months ended June 30, 2024 and 2023, respectively, and $26.9 million and $27.4 million for the six months ended June 30, 2024 and 2023, respectively. These losses have resulted principally from costs incurred in connection with research and development activities and selling, general and administrative costs associated with our operations. We expect to continue to incur significant expenses and operating losses as we seek approval and pursue the potential commercialization of LNZ100. These costs include expenses associated with the regulatory approval process for LNZ100, and the preparation for the potential commercial launch of our product, subject to FDA approval. From inception through June 30, 2024, we received funding of $13.0 million from our initial seed financing, $47.0 million from the sale of Series A Convertible Preferred Stock, $10.0 million from the sale of Series A-1 Convertible Preferred Stock, gross proceeds of $83.5 million from the sale of Series B Convertible Preferred Stock, approximately $117.8 million in cash and cash equivalents from the Merger, approximately $53.5 million in gross cash proceeds from the March 2024 PIPE Financing, and $30.0 million in gross cash proceeds from the July 2024 PIPE Financing. Funding Requirements We believe that our cash, cash equivalents and marketable securities as of June 30, 2024, in addition to the July 2024 PIPE Financing, will allow us to continue to build infrastructure and commercialize LNZ100 , subject to FDA approval, and such funds are anticipated to fund the Company to positive operating cash flow subsequent to such commercial launch. This belief is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than expected. Changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than currently anticipated, and we may need to seek additional funds sooner than planned. Our future capital requirements will depend on many factors, including but not limited to: • the costs and timing of manufacturing for LNZ100 and commercial manufacturing if LNZ100 is approved; • the results, costs, and timing of any additional clinical trials we are required to complete for LNZ100; • costs associated with establishing a sales, marketing, and distribution infrastructure to commercialize LNZ100 if we obtain marketing approval; • our ability to generate positive operating cash flow from sales of LNZ100 subsequent to commercial launch of LNZ100, if LNZ100 is approved; • the costs, timing, and outcome of regulatory review of LNZ100; • the legal costs of obtaining, maintaining, and enforcing our patents and other intellectual property rights; • our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company; • the terms and timing of establishing and maintaining licenses and other similar arrangements; • our ability to achieve sufficient market acceptance and adequate market share and revenue for LNZ100, if approved; and • costs associated with any products or technologies that we may in-license or otherwise acquire or develop. 26 Table of Contents We intend to evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans, operating performance and the condition of the capital markets at the time we seek financing. We cannot be assured that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity or equity-linked securities, those securities may have rights, preferences or privileges senior to the rights of our common stock, and our stockholders may experience dilution. If we raise additional funds through the incurrence of indebtedness, then we may be subject to increased fixed payment obligations and could be subject to restrictive covenants, such as limitations on our ability to incur additional debt, and other operating restrictions that could adversely impact our ability to conduct our business. Cash Flows The following table summarizes our cash flows for the years presented (amounts in thousands): Six Months Ended June 30, 2024 2023 Net cash (used in) provided by: Operating activities $ (39,732) $ (26,322) Investing activities (80,390) (26,881) Financing activities 169,131 83,179 Net increase in cash and cash equivalents $ 49,009 $ 29,976 Net Cash Used in Operating Activities Net cash used in operating activities primarily results from net loss adjusted for non-cash expenses, changes in working capital components, amounts due to contract research organizations to conduct our clinical programs, manufacturing of drug product and employee-related expenditures for research and development and selling, general and administrative activities. Cash flows from operating activities will continue to be impacted by spending to develop and pursue regulatory approval for LNZ100 and commercialization activities, if approval is obtained, and will also be impacted by any potential future revenues from commercialization activities. Cash flows will also continue to be affected by other operating and general administrative activities, including operating as a public company. For the six months ended June 30, 2024, cash used in operating activities was $39.7 million and resulted from net loss of $26.9 million in addition to an approximate $13.4 million cash outflow from the payment of accounts payable and accrued liabilities associated with the Merger and accrued clinical activities, offset by $1.0 million in non-cash adjustments primarily driven by share-based compensation expense and the change in the fair value of preferred warrants. For the six months ended June 30, 2023, cash used in operating activities was $26.3 million primarily resulting from net loss of $27.4 million. Net Cash Used in Investing Activities Cash used in investing activities for the six months ended June 30, 2024 was $80.4 million, primarily due to $111.3 million of purchases of marketable securities, and partially offset by $31.0 million in proceeds from maturities of marketable securities. Cash used in investing activities for the six months ended June 30, 2023 was $26.9 million, primarily due to purchases of marketable securities. Net Cash Provided by Financing Activities For the six months ended June 30, 2024, cash provided by financing activities was $169.1 million and includes $117.8 million in cash and cash equivalents acquired in the Merger, $53.5 million in gross cash proceeds from the March 2024 PIPE Financing, and approximately $3.8 million in net cash proceeds from exercises of stock options. For the six months ended June 30, 2023, cash provided by financing activities was $83.2 million and consisted of $83.0 million in proceeds from the sale by LENZ OpCo of Series B Convertible Preferred Stock, and $0.2 million in net cash proceeds from the exercise of LENZ OpCo stock options. 27 Table of Contents Material Cash Requirements from Contractual Obligations In February 2022, we entered into a lease for 2,930 square feet of office space in Del Mar, California. In March 2023, we entered into a lease amendment for a 647 square feet expansion of our office space at the same facility. The term of the lease, as amended, is forty-eight months from the original commencement date, terminating March 31, 2026, unless terminated sooner. In April 2024, we entered into a lease for 9,795 square feet of office space in Solana Beach, California. The term of the lease is 39 months from the commencement date of July 1, 2024, ending September 30, 2027. See Note 6 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further details related to this lease. Rent expense is recorded on a straight-line basis. Cash paid for rent for the six months ended June 30, 2024 and 2023 was $76,000 and $35,000, respectively. We expect cash paid for rent to increase during the three months ended September 30, 2024 due to the lease of office space in Solana Beach, California. See Note 6 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for details related to future lease payments as of June 30, 2024. We also have contracts with various organizations to conduct research and development activities, including clinical trial organizations to manage regulatory and any remaining clinical trial activities, and manufacturing companies to manufacture the drug product used in the regulatory process and clinical trials. The scope of the services under these research and development contracts can be modified and the contracts cancelled by us upon written notice. In the event of a cancellation, the company would be liable for the cost and expenses incurred to date as well as any close out costs of the service arrangement. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC. Critical Accounting Policies and Estimates Our management’s discussion and analysis of the financial condition and results of operations is based on our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with U.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make certain estimates, judgements and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of expenses during the periods presented. We believe that the estimates, judgments and assumptions are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our condensed consolidated financial statements will be affected. Historically, revisions to our estimates have not resulted in a material change to our condensed consolidated financial statements. While our significant accounting policies are described in more detail in the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements. Preferred Stock Warrants Liability LENZ OpCo had freestanding warrants to purchase shares of Series A convertible preferred stock, referred to herein as the Series A Warrants. Upon certain change in control events that were outside of LENZ OpCo's control, including liquidation, sale or transfer of control, holders of the preferred stock could cause redemption of such warrants. The Series A Warrants were revalued at each subsequent balance sheet date, with fair value changes recognized as increases or reductions to other income (expense), net in the accompanying statements of operations. See Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for information concerning certain of the specific assumptions we used in determining the value of the Series A Warrants at each reporting period. Upon completion of the Merger, the Series A Warrants became exercisable into shares of common stock and will no longer continue to be remeasured at each reporting date. Stock-Based Compensation Expense Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of equity awards using the Black-Scholes option pricing model and recognize forfeitures as they occur. Estimating the fair value of equity awards as of the grant date using valuation models, such as the Black-Scholes option pricing model, is affected by assumptions regarding a number of variables, including the risk-free interest rate, the expected stock price 28 Table of Contents volatility, the expected term of stock options, the expected dividend yield and the fair value of the underlying common stock on the date of grant. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. We determine the inputs and assumptions to the Black-Scholes option pricing model in the following manner: Fair Value of Common Stock— Prior to the Merger, since there was no public market for our common stock, our board of directors, with input from management, determined the fair value of our common stock on each grant date by considering a number of objective and subjective factors, the achievement of clinical and operational milestones by the Company, the significant risks associated with the Company’s stage of development, capital market conditions for life science companies, particularly similarly situated, privately held, early-stage life science companies, the Company’s available cash, financial condition, and results of operations, the most recent sales of the Company’s convertible preferred stock, the preferential rights of the outstanding convertible preferred stock and Class B convertible common stock. Historically, these independent third-party valuations of our equity instruments were generally performed contemporaneously with identified value inflection points. Following the Merger, the fair market value of our common stock is based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded, adjusted for special dividends, if any. Expected Term— The Company uses the simplified method as prescribed by the Securities and Exchange Commission Staff Accounting Bulletin No. 107, Share-Based Payment , to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. Expected Volatility— Given our limited historical stock price volatility data, we derived the expected volatility from the average historical volatilities over a period approximately equal to the expected term of comparable publicly traded companies within our peer group that were deemed to be representative of future stock price trends as we have limited trading history for our common stock. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. Risk-Free Interest Rate— The risk-free interest rate is based on a United States Treasury instrument whose term is consistent with the expected term of the stock options. Expected Dividend Yield— The expected dividend yield is based on the Company’s historical and expected dividend payouts. The Company has historically paid no dividends, other than the special dividend paid by Graphite immediately prior to the close of the Merger, and does not anticipate dividends to be paid in the future. Other Company Information Jumpstart Our Business Startups Act ( “ JOBS Act ” ) We are an emerging growth company, as defined in the JOBS Act, and we may remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the initial public offering of Graphite’s common stock (i.e., December 31, 2026). For so long as we remain an emerging growth company, we are permitted and intend to rely on certain exemptions from various public company disclosure and reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments not previously approved. Accordingly, the information we disclose in our SEC filings may not be comparable with the information stockholders receive from other public companies in which they may hold stock. Additionally, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Prior to the Merger, Graphite elected to use, and we intend to continue to use, this extended transition period for complying with certain or new or revised accounting standards until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the closing of Graphite's initial public offering (i.e., December 31, 2026), (b) in which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th, (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period, or (iii) if we affirmatively and irrevocably opt out of the extended transition period provided by the JOBS Act. We are also a “smaller reporting company” because the market value of our stock held by non-affiliates was less than $700 million as of June 30, 2024 and the Company's annual revenue was less than $100 million during the fiscal year ended 29 Table of Contents December 31, 2023. We may continue to be a smaller reporting company in any given year if either (i) the market value of our stock held by non-affiliates is less than $250 million as of June 30 in the most recently completed fiscal year or (ii) our annual revenue is less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million as of June 30 in the most recently completed fiscal year. 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. Recent Accounting Pronouncements See Note 2 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not required to provide the information required under this item.