Omega Therapeutics, Inc. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2021

OR

For the transition period from ________________ to ________________

Commission File Number: 001-40657

Omega Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

(617) 949-4360

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of September 3, 2021, the registrant had 47,756,474 shares of common stock, $0.001 par value per share, outstanding.

Table of Contents

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future results of operations and financial position, business strategy, product candidate development, prospective products, product candidate approvals, research and development activities and costs, future revenue, timing and likelihood of success of our business plans, plans and objectives of management, future results and timing of clinical trials, treatment potential of our product candidates, and the market potential of our product candidates are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” “would” or “continue” or the negative of these terms or other similar expressions, although not all forward-looking statements contain these words. The forward-looking statements in this Quarterly Report are only predictions and are based largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of known and unknown risks, uncertainties and assumptions, including those described under Part II, Item 1A. “Risk Factors” in this Quarterly Report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

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SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties, including those described in Part II Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:

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PART I—FINANCIAL INFORMATION

Omega Therapeutics, Inc.

Condensed Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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Omega Therapeutics, Inc.

Condensed Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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Omega Therapeutics, Inc.

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share amounts)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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Omega Therapeutics, Inc.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

The accompanying notes are an integral part of these unaudited condensed financial statements.

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Omega Therapeutics, Inc.

Notes to Condensed Financial Statements

(unaudited)

1. Nature of the Business and Basis of Presentation

Organization

Omega Therapeutics, Inc. (the “Company” or “Omega”) is a development-stage biotechnology company pioneering a new systematic approach to use mRNA therapeutics as programmable epigenetic medicines by leveraging its OMEGA Epigenomic Programming platform (“OMEGA platform”). The OMEGA platform harnesses the power of epigenetics, the mechanism that controls gene expression and every aspect of an organism's life from cell genesis, growth and differentiation to cell death. The OMEGA platform enables control of fundamental epigenetic processes to correct the root cause of disease by returning aberrant gene expression to a normal range without altering native nucleic acid sequences. The Company was incorporated in July 2016 (“inception”) as a Delaware corporation and its offices are in Cambridge, Massachusetts.

Liquidity

Since its inception, the Company has devoted substantially all of the resources to building its platform and advancing development of its portfolio of programs, establishing and protecting its intellectual property, conducting research and development activities, organizing and staffing the Company, business planning, raising capital and providing general and administrative support for these operations. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry including, but not limited to, technical risks associated with the successful research, development and manufacturing of product candidates, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Current and future programs will require significant research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure. Even if the Company’s drug development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

On August 3, 2021, the Company closed its initial public offering (“IPO”) of 7,400,000 shares of the Company’s common stock at a public offering price of $17.00 per share. The gross proceeds from the IPO were $125.8 million and the net proceeds were approximately $113.4 million, after deducting underwriting discounts and commissions and other offering expenses payable by the Company. Upon completion of the Company’s IPO, all of the Company’s then outstanding redeemable convertible preferred stock was automatically converted into an aggregate of 34,678,733 shares of common stock. On August 17, 2021, the Company issued and sold 900,976 shares of its common stock pursuant to the partial exercise of the underwriters’ option to purchase additional shares, at a public offering price of $17.00 per share, for aggregate gross proceeds of $15.3 million. The Company received appropriately $14.2 million in net proceeds after deducting underwriting discounts and commissions.

As presented in the unaudited condensed financial statements, the Company had cash and cash equivalents of $122.4 million at June 30, 2021. The Company expects that its cash and cash equivalents, including the net proceeds from its IPO, will enable it to fund its operating expenses and capital expenditure requirements for at least twelve months from September 10, 2021, the filing date of this Quarterly Report on Form 10-Q. However, additional funding will be necessary beyond this point to fund future preclinical and clinical activities and to develop new product candidates. The Company expects to finance its future cash needs through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements, or other sources.

COVID-19-Related Significant Risks and Uncertainties

With the global COVID-19 pandemic continuing throughout 2021, the Company is following, and plans to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures. In response to the direction from state and local governmental authorities, the Company has restricted access to its facility to those individuals who must perform critical research and laboratory support activities that must be completed on site, limited the number of such people that can be present at its facility at any one time and required that certain employees work remotely if possible. The Company expects to continue incurring additional costs to ensure it adheres to the guidelines instituted by the federal, state and local governments and to provide a safe working environment to its onsite employees.

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The extent to which the COVID-19 pandemic and variants of the virus impacts the Company’s business, its corporate development objectives, results of operations and financial condition, and the fair value of and market for its common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements, and the effectiveness of actions taken globally to contain and treat the disease. Disruptions to the global economy, disruption of global healthcare systems, and other significant impacts of the COVID-19 pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.

While the COVID-19 pandemic did not significantly impact the Company’s business or results of operations during the six months ended June 30, 2021, the length and extent of the pandemic, its consequences, and containment efforts will determine the future impact on the Company’s operations and financial condition.

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”), and Accounting Standards Update (“ASU”), of the Financial Accounting Standards Board (“FASB”). All amounts herein are expressed in U.S. dollars (“USD”) unless otherwise noted.

2. Summary of Significant Accounting Policies

Unaudited Condensed Financial Information

The accompanying unaudited condensed financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The unaudited condensed financial statements have been prepared on the same basis as audited financial statements, except certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair representation of the results for the reported periods. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s final prospectus for its IPO dated August 2, 2021 and filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Prospectus”).

The results for the six months ended June 30, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period.

Use of Estimates

The preparation of the unaudited condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses, and the disclosure of contingent assets and liabilities as of and during the reporting period. The Company bases its estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances.

Significant estimates and assumptions reflected in these unaudited condensed financial statements include, but are not limited to, the selection of useful lives of property and equipment, the fair values of common stock, redeemable convertible preferred stock, warrants, success fee obligation, and stock-based compensation. Actual results could differ from these estimates. Changes in estimates are reflected in reported results in the period in which they become known.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of significant accounting policies,” to the Company’s audited financial statements included in the Prospectus. Except as detailed below, there have been no material changes to the significant accounting policies during the six months ended June 30, 2021.

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Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit as a reduction of proceeds generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the unaudited condensed consolidated statement of operations. The Company recorded deferred offering costs, related to the IPO, of approximately $1.6 million as of June 30, 2021. Upon closing the IPO in August 2021, deferred offering costs were derecognized and recorded against the IPO proceeds as a reduction to additional paid-in capital.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). 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 a right-of-use asset and a lease liability 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. As the Company has elected to use the extended transition period for complying with new or revised accounting standards as available under the Jumpstart Our Business Startups Act (“JOBS Act”), the standard is effective for the Company beginning January 1, 2022, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes-Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes, enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Adoption of the standard requires certain changes to be made prospectively and certain others to be made retrospectively. As the Company has elected to use the extended transition period for complying with new or revised accounting standards as available under the JOBS Act, the standard is effective for the Company beginning January 1, 2022, with early adoption permitted. The Company does not expect ASU 2019-12 to have a material effect on the Company’s financial statements.

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

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4. Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):

Depreciation expense for the three months ended June 30, 2021 and 2020 was $0.3 million and $0.2 million, respectively; depreciation expense for the six months ended June 30, 2021 and 2020 was $0.6 million and $0.4 million, respectively.

5. Accrued Expenses

Accrued expenses consist of the following (in thousands):

6. Term Loan

On March 9, 2018 (“Closing Date”), the Company entered into the loan and security agreement (“Loan Agreement”) with Pacific Western Bank (“PWB”), a California state-chartered bank. Under the Loan Agreement, the Company may borrow amounts not to exceed $8.0 million, consisted of Tranche I and Tranche II, with the Tranche I funded on the Closing Date and Tranche II funded no later than 18 months from the Closing Date. The Company borrowed $3.5 million under Tranche I on the Closing Date and $4.5 million under Tranche II in August 2018, and the full amount of $8.0 million was to be repaid beginning 18 months from the Closing Date in thirty equal installments, including interest at a floating annual rate equal to the greater of (i) 0.75% above the prime rate then in effect and (ii) 5.00%, due monthly starting the first month after the Closing Date.

In conjunction with the Loan Agreement, under Tranche I, the Company issued a warrant to PWB to purchase 87,500 shares of Series A redeemable convertible preferred stock (“Series A Preferred Stock”) at the initial strike price of $0.50 per share. The warrant is exercisable for a 10-year period. Additionally, the warrant shall be exercisable for an additional number of shares of Series A Preferred Stock equal to the amount borrowed under Tranche II multiplied by 0.0125. In no event shall the warrant be exercisable for more than 200,000 shares of Series A Preferred Stock. Upon closing of Tranche II, the warrant was not exercised for additional number of shares of Series A Preferred Stock. In lieu of exercising the warrant, PWB may, in whole or in part, convert the warrant into a number of shares of Series A Preferred Stock, determined by (a) dividing the aggregate fair market value of the Series A Preferred Stock shares minus the aggregate warrant price of such shares by (b) the fair market value of one share of Series A Preferred Stock. The fair market value of the Series A Preferred Stock shares shall be determined based upon either the publicly traded closing price on the date of the conversion or, if not publicly traded, a value deemed appropriate by the Company’s board of directors. Refer to Note 7, Fair value of financial instruments, for further discussion on the valuation methodology and inputs for the determination of the fair value of the warrants.

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On September 30, 2019, the Company entered into an amendment to the Loan Agreement (the “First Amendment”), in which PWB made an additional term loan pursuant to a new Tranche III to the Company in an aggregate principal amount of $12.0 million. The proceeds of the term loan pursuant to Tranche III were first applied to the repayment in full of all outstanding principal and accrued interest on the outstanding term loan of $8.0 million borrowed pursuant to Tranche I and Tranche II; the remaining cash proceeds of $4.0 million was used for general working capital and for capital expenditures purposes. The maturity date of the additional term loan was initially March 9, 2022, and it would have been repaid beginning on January 9, 2020 in twenty-seven equal installments. However, the first closing of the Company’s Series B redeemable convertible preferred stock (“Series B Preferred Stock”) financing in January 2020 satisfied the cash proceeds milestone noted in the First Amendment, in which the maturity date of the amended term loan was extended to June 9, 2023, and the term loan was to be repaid beginning in January 2021 in thirty equal installments, including interest at a floating annual rate equal to the greater of (i) 0.75% above the prime rate then in effect and (ii) 6.00%, due monthly starting the first month after September 30, 2019. The Company incurred $15 thousand of debt issuance costs, which was recorded as a direct reduction against the additional term loan and amortized over the life of the associated term loan as a component of interest expense using the effective interest method.

In conjunction with the First Amendment, the Company also issued a warrant to purchase 350,000 shares of Series A Preferred Stock, which effectively restated and replaced the original warrant agreement. The strike price of the amended warrant is $0.50 per share, and the term remains unchanged, expiring in March 2028. No warrants have been exercised as of June 30, 2021. Refer to Note 7, Fair value of financial instruments, for further discussion on the valuation methodology and inputs for the determination of the fair value of the warrants. Upon the closing of the IPO, the Company’s outstanding warrants to purchase Series A Preferred Stock automatically became warrants to purchase an aggregate of 92,647 shares of common stock.

As the warrants issued are freestanding financial instruments that are exercisable for contingently redeemable shares, they were initially recorded at fair value on the date of issuance as a liability, with a corresponding discount recorded against the face value of the term loan. The discount was accreted against the face value of the term loan over its remaining term as additional interest expense. At the end of each reporting period, the change in estimated fair value of the warrants during the period is recognized as a component of other income (expense), net in the statements of operations and comprehensive loss.

On January 22, 2020, the Loan Agreement was further amended (the “Second Amendment”) to extend the principal repayment start date, from January 9, 2020 as noted in the First Amendment to February 9, 2020; the number of repayment installments was also amended from twenty-seven equal installments to twenty-six equal installments. No additional proceeds were taken under the Second Amendment, and there were no other material amendments to the terms and conditions.

On December 30, 2020, the Loan Agreement was further amended (the “Third Amendment”) to extend the principal repayment date. No additional proceeds were taken under the Third Amendment. The maturity date of the term loan was extended to June 30, 2023, and it is to be repaid beginning on June 30, 2021 in twenty-four equal installments, including interest at a floating annual rate equal to the greater of (i) 0.75% above the prime rate then in effect and (ii) 6.00%, due monthly starting the first month after December 30, 2020. The Company incurred $15 thousand of debt issuance costs, which have been recorded as a direct reduction against the term loan and amortized over the life of the associated term loan as a component of interest expense using the effective interest method.

Borrowings under the Loan agreement, as amended, are collateralized by substantially all of the Company’s personal property, other than its intellectual property. There are no financial covenants associated with the Loan Agreement, as amended; however, the Company is subject to certain affirmative and negative covenants to which the Company will remain subject until maturity.

As a result of the closing of Series C redeemable convertible preferred stock (“Series C Preferred Stock”) in March 2021, as further discussed in Note 10, Redeemable convertible preferred stock, the Company satisfied the cash proceeds milestone as defined in the Third Amendment, in which the Company received gross cash proceeds of more than $50.0 million from the issuance of new preferred stock prior to June 30, 2021. Accordingly, the principal repayment date of the term loan was extended to December 31, 2021 and the maturity date was extended to December 31, 2023. There are no other changes to the terms as a result of the achievement of the cash proceeds milestone.

Additionally, the Company is required to pay a success fee of $0.2 million upon the occurrence of a specified liquidity event, as described in the Loan Agreement, which includes an IPO. The Company determined that this obligation represented a freestanding financial instrument. Accordingly, the success fee obligation was classified as a liability on the

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Company’s balance sheets and initially recorded at fair value, with changes in fair value for each reporting period recognized in other income (expense), net in the statements of operations and comprehensive loss. The fair value of such obligation is remeasured at the end of each reporting period until the liability is settled, for which it was settled and paid in August 2021 upon the completion of the IPO.

As of June 30, 2021 and December 31, 2020, the long-term debt, current portion was $3.0 million, and the long-term debt was $9.0 million. The Company’s outstanding term loan balance was comprised of the following (in thousands):

The Company determined that the expected life of the debt was equal to the term on the term loan. The effective interest rate on the liability component ranged from 5.53% to 7.51% for the period from the date of issuance through June 30, 2021. The following table sets forth total interest expense recognized related to the term loan (in thousands):

At June 30, 2021 and December 31, 2020, accrued interest on the term loan was $58 thousand and $44 thousand, respectively.

The Company is required to repay the following principal amounts in connection with its term loan (in thousands):

7. Fair Value of Financial Instruments

The fair value of the Company’s financial instruments is summarized in the tables below (in thousands):

The Company’s warrant liability and success fee obligation contain unobservable inputs that reflected the Company’s own assumptions in which there is little, if any, market activity at the measurement date. Accordingly, the Company’s warrant liability and success fee obligation are measured at fair value on a recurring basis using unobservable

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inputs at each reporting period and are classified as Level 3 inputs. The warrant liability is recorded as other liabilities on the balance sheets as they are deemed more probable than not by the Company to be settled in longer than one year.

The fair values of the warrants are estimated using the Black-Scholes option-pricing model. The expected terms represent the remaining contractual term of the warrants. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. The expected dividend is zero as the Company has not paid nor does it anticipate paying any dividends on its common stock in the foreseeable future. The Company historically has been a private company and lacks company-specific historical and implied volatility information of its stock. Therefore, it estimates its expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants.

The assumptions used in the Black-Scholes option-pricing model for the warrants were as follows:

The fair value of the warrants will be remeasured at each reporting period, with changes in fair value recognized in the statements of operations and comprehensive loss. The change in the fair value of the warrant liability during the three and six months ended June 30, 2021 was less than $0.1 million and $0.3 million, respectively; and there was an immaterial change in the fair value of the warrant liability for both of the three months and six months ended June 30, 2020.

The fair value of the success fee obligation was determined using the probability-weighted expected return method. The key estimates and assumptions impacting the fair value include the probability of achieving a specified liquidity event, the expected timing of achieving a liquidity event and discount rate. The fair value of the success fee obligation is remeasured at each reporting period, with changes in fair value recognized in the statement of operations and comprehensive loss, until such liability is settled. During the three and six months ended June 30, 2021, the change in the fair value of the success fee obligation was immaterial. The success fee obligation is recorded as other current liabilities on the balance sheets as it is deemed more probable than not by the Company to be settled in less than one year; such obligation was settled in August 2021 upon the closing of the IPO.

The following reflects the significant quantitative inputs used to determine the valuation of the success fee obligation during the six months ended June 30, 2021:

The following table provides a roll-forward of the fair values of the Company’s warrant liability and the success fee obligation for which fair value is determined by Level 3 inputs (in thousands):

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8. Commitments and Contingencies

Operating Leases

In 2017, the Company entered a noncancelable operating lease agreement to lease its office space at 325 Vassar Street, Cambridge, Massachusetts, which will expire in September 2024. The Company is required to pay property taxes, insurance, and normal maintenance costs. The operating lease contains predetermined fixed escalations of minimum rentals during the lease term. During 2018, the Company received $1.1 million of landlord-funded leasehold improvements related to the leased office space. The landlord-funded leasehold improvements were recorded as property and equipment, net and deferred rent in the balance sheets and are being amortized as a reduction to rent expense over the life of the lease. In 2019 and 2020, the Company entered into sublease agreements with two related parties to sublease this office and laboratory space. Refer to Note 15, Related party transactions, for further details.

On July 13, 2020, the Company entered into a Shared Space Arrangement (“the Arrangement”) with Senda Biosciences, Inc. (“Senda”, also formerly known as Kintai Therapeutics, Inc.) to share one-third of Senda’s 69,867 square feet of leased space at 20 Acorn Park Drive, Cambridge, Massachusetts. Senda is a related party as it is an affiliate of Flagship Pioneering (“Flagship”). The Arrangement commenced on August 1, 2020 and continues through July 31, 2022 with two options to extend the term of the Arrangement for a period of 24 months each. The operating lease contains predetermined fixed escalations of minimum rentals during the lease term, and the Company is required to pay property taxes, insurance, and normal maintenance costs. During the three and six months ended June 30, 2021, the Company incurred $0.6 million and $1.2 million for rental expenses. As of June 30, 2021 and December 31, 2020, the Company did not have any outstanding payments due to Senda.

The Company recognizes the rental expense on a straight-line basis over the life of the respective lease from the date the Company takes possession of the office and records the difference between amounts charged to operations and amounts paid as deferred rent. Rent expense under both lease agreements for the three months ended June 30, 2021 and 2020 was $0.8 million and $0.4 million, respectively; rent expense under both lease agreements for the six months ended June 30, 2021 and 2020 was $1.6 million and $0.7 million, respectively.

As of June 30, 2021, the future minimum lease payments for the Company’s facility operating leases were as follows (in thousands):

9. License Agreements

Flagship Pioneering Innovations V, Inc.

In March 2019, the Company entered into an exclusive license agreement with Flagship Pioneering Innovations V, Inc., an affiliate of one of the Company’s principal stockholders, under which the Company was granted an exclusive, worldwide, royalty-bearing, sublicensable, transferable license under specified patent rights to develop, manufacture and commercialize licensed products (the “Flagship License”). Under the terms of the Flagship License, the Company is obligated to pay low single digit percentage royalties on net sales of licensed products by the Company. Royalties shall be paid by the Company on a country-by-country basis until expiration or abandonment of the last valid patent claim covering such licensed product in such country. The Company is also obligated to reimburse Flagship for patent prosecution costs.

The royalty payment is contingent upon sales of licensed products under the Flagship License. As such, when such expense is considered probable and estimable at the commencement of sales, the Company will account for the royalty expense as cost of sales for the amount it is obligated.

Whitehead Institute for Biomedical Research

In May 2019, the Company entered into an exclusive license agreement with the Whitehead Institute for Biomedical Research (“WIBR”), an affiliate of one of the Company’s board members, under which the Company was granted an exclusive, worldwide, royalty-bearing, sublicensable license under specified patent rights to research, make,

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have made, use, sell, offer to sell, lease and import products and to perform and have performed licensed processes (the “WIBR Exclusive License”). Under the terms of the WIBR Exclusive License, the Company paid a nonrefundable upfront fee of less than $0.1 million upon the commencement of the exclusive license agreement. The Company is obligated to pay WIBR annual license maintenance fees of less than $0.1 million and low single digit percentage royalties on net sales of licensed products by the Company and its affiliates and sublicensees. Additionally, the Company is required to make milestone payments of up to $1.7 million in the aggregate for each of the first three licensed products (excluding backup products) upon the achievement of specified clinical, regulatory, and sublicensing milestones. In addition, the Company is required to pay to WIBR a percentage of the non-royalty payments that it receives from sublicensees of the WIBR Exclusive License. This percentage ranges from zero to low double-digits and will be based upon the stage of development of the licensed product at the time such sublicense is executed.

In May 2019, the Company also entered into a co-exclusive license agreement with WIBR under which the Company was granted a co-exclusive, worldwide, royalty-bearing, sublicensable license under specified patent rights to research, make, have made, use, sell, offer to sell, lease and import products and to perform and have performed licensed processes (the “WIBR Co-Exclusive License”). Under the terms of the WIBR Co-Exclusive License, the Company paid a nonrefundable upfront fee of less than $0.1 million upon the commencement of the co-exclusive license agreement. The Company is obligated to pay WIBR annual license maintenance fees of less than $0.1 million and sub single digit percentage royalties on net sales of licensed products by the Company and its affiliates and sublicensees as well as low single digit percentage royalties on licensed service income received by the Company and its affiliates. Additionally, the Company is required to make milestone payments of up to $1.9 million in the aggregate for each of the first three licensed products (excluding backup products) upon the achievement of specified clinical and regulatory milestones. In addition, the Company is required to pay to WIBR annual fees of less than $0.1 million for each sublicense agreement.

For both of the three-month periods ended June 30, 2021 and 2020, the Company recognized expenses of less than $0.1 million for the reimbursable patent costs related to the licenses under the agreements. During both of the six months ended June 30, 2021 and 2020, the Company recognized expenses for the license maintenances fees and the reimbursable patent costs in the amount of $0.1 million. There was no outstanding payment due to WIBR as of June 30, 2021 and December 31, 2020.

The annual maintenance fees will be recorded as an expense on an annual basis based on the stated amount for the applicable year. Upon determination that a milestone payment is probable to occur, the amount due will be recorded as research and development. As the triggering of these milestone payments was not considered probable during both of the three-month periods and six-month periods ended June 30, 2021 and 2020, no expense has been recorded for these milestones during these periods. Lastly, the royalty payments and the sublicense non-royalty payments are contingent upon sales of licensed products or execution of a sublicence agreement under the WIBR Exclusive and Co-Exclusive Licenses. As such, when such expenses are considered probable and estimable at the commencement of sales or execution of a sublicense agreement, the Company will accrue royalty expense and sublicence non-royalty payments, as applicable, for the amount the Company is obligated.

Acuitas Therapeutics, Inc.

In October 2020, the Company entered into a development and option agreement (the “Development and Option Agreement”) with Acuitas Therapeutics, Inc. (“Acuitas”). Under the terms of the Development and Option Agreement, the parties agreed to jointly develop certain products combining the Company’s gene modulating therapeutics with Acuitas’s lipid nanoparticles. Additionally, in accordance with the Development and Option Agreement, the Company has options to obtain non-exclusive, worldwide, sublicensable licenses under Acuitas’s patents and know-how related to lipid nanoparticle technology (“Acuitas LNP Technology”) with respect to two specified targets (e.g., OEC constructs) (“Reserved Targets”) to develop and commercialize one or more therapeutic products relating to such targets. For each option and Reserved Target, the Company is obligated to pay an annual technology access fee and target reservation and maintenance fees collectively in the low-mid six figures until such Reserved Target is removed from the Reserved Target list or until the Company exercises an option with respect to such Reserved Target. In the event that the Company exercises the options, the Company will pay $1.5 million for the first non-exclusive license and $1.75 million for the second non-exclusive license. Under the terms of the Development and Option Agreement, the Company is also responsible for the FTE funding obligations and reimbursements to Acuitas for certain development and material costs incurred by them, which is currently approximately $0.4 million per year.

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In March 2021, the Company exercised the first option under the Development and Option Agreement and entered into a non-exclusive license agreement with Acuitas (the “Acuitas License Agreement”) under which the Company was granted a non-exclusive, worldwide, sublicensable license under the Acuitas LNP Technology to research, develop, manufacture, and commercially exploit products consisting of the Company’s gene modulating therapeutics and Acuitas’s lipid nanoparticles. In connection with the option exercise, the Company paid Acuitas an option exercise fee of $1.5 million. Under the Acuitas License Agreement, the Company is required to pay Acuitas an annual license maintenance fee in the high six figures until the Company achieves a particular development milestone. Acuitas is entitled to receive potential clinical and regulatory milestone payments of up to $18.0 million in the aggregate. With respect to the sale of each licensed products, the Company is also obligated to pay Acuitas low single digit percentage royalties on net sales of the licensed products by the Company and its affiliates and sublicensees in a given country until the last to occur, in such country, of (i) the expiration or abandonment of all licensed patent rights covering the licensed product, (ii) expiration of any regulatory exclusivity for the licensed product, or (iii) ten years from the first commercial sale of the licensed product.

During the three and six months ended June 30, 2021, the Company recorded an aggregate of $0.4 million and $2.0 million of research and development expenses, consisting of the option exercise fee, the costs of services performed by Acuitas, the material costs and the reimbursable costs incurred.

The option exercise fee under the Development and Option Agreement was recorded as research and development expense upon the Company’s exercise of the first option. Additionally, the technology access fees, target reservation and maintenance fees, expenses associated with the FTE funding obligations and reimbursements for development and material costs incurred by Acuitas are recorded as research and development expense when incurred. The annual maintenance fee will be recorded as an expense on an annual basis based on the stated amount for the applicable year. Upon determination that a milestone payment is probable to occur, the amount due will be recorded as research and development expense. As the triggering of these milestone payments was not considered probable during the three and six months ended June 30, 2021, no expense has been recorded for these milestones during the periods. Lastly, the royalty payment is contingent upon sales of licensed products under the Acuitas License Agreement. As such, when such expenses are considered probable and estimable at the commencement of sales, the Company will accrue royalty expense for the amount the Company is obligated.

10. Redeemable Convertible Preferred Stock

During August 2017 and March 2021, the Company issued Series A, Series B and Series C Preferred Stock (collectively the “Preferred Stock”) to investors in private placements. Upon completion of the Company’s IPO, all of the Company’s then outstanding Preferred Stock was automatically converted into an aggregate of 34,678,733 shares of common stock.

Series A Redeemable Convertible Preferred Stock

During 2017 and 2019, the Company issued an aggregate of 56,775,232 shares of Series A Preferred Stock at a purchase price of $0.50 per share in exchange for cash proceeds of $25.5 million and the exchange of approximately $2.8 million in outstanding promissory notes, including $54 thousand in accrued interest. In connection with the issuance of Series A Preferred Stock during 2017 and 2019, the Company incurred less than $0.1 million of issuance costs. No additional shares of Series A Preferred Stock were issued after 2019.

Series B Redeemable Convertible Preferred Stock

On January 27, 2020, the Company issued 24,066,666 shares of Series B Preferred Stock at a purchase price of $1.50 per share for aggregate proceeds of $36.1 million. On June 2, 2020, the Company issued an additional 3,333,333 shares of Series B Preferred Stock at the purchase price of $1.50 per share for aggregate proceeds of $5.0 million. On August 3, 2020, the Company issued 5,000,000 shares of Series B Preferred Stock at the purchase price of $1.50 per share for aggregate proceeds of $7.5 million. No additional shares of Series B Preferred Stock were issued after August 2020. In connection with the issuance of Series B Preferred Stock in 2020, the Company incurred $83 thousand of issuance costs.

Series C Redeemable Convertible Preferred Stock

In March 2021, the Company issued an aggregate of 41,833,328 shares of Series C Preferred Stock, at a price of $3.00 per share, for gross proceeds of $125.5 million. The terms of the Series C Preferred Stock are substantially the same as the terms of the Series A and Series B Preferred Stock. No additional shares of Series C Preferred Stock were issued after March 2021. In connection with the issuance of Series C Preferred Stock in March 2021, the Company incurred $0.1 million of issuance costs. The Company further amended its Amended and Restated Certificate of Incorporation to increase the authorized preferred stock issuable from 107,125,232 shares to 132,858,564 shares.

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The Preferred Stock consisted of the following (in thousands, except for share data):

The following is a summary of the rights and preferences of the Preferred Stock as of June 30, 2021 and December 31, 2020:

Conversion—     Each share of Preferred Stock is convertible, at the option of the holder into an equal amount of fully paid and non-assessable shares of common stock as is determined by dividing the respective original Preferred Stock issue price by the respective Preferred Stock Conversion Price in effect at the time of conversion. The Series A, Series B and Series C Conversion Price shall be equal to $0.50, $1.50 and $3.00, respectively, subject to appropriate adjustment as set forth in the Company’s Amended and Restated Certificate of Incorporation, as amended and restated. As such, the shares of Preferred Stock currently convert on a one-for-one basis. No fractional shares of common stock will be issued.

Upon either (a) the closing of the sale of shares of common stock, in a firm-commitment underwritten public offering with at least $35,000,000 of gross proceeds to the Company or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of a majority in voting power of the then-outstanding shares of Preferred Stock, then (i) all outstanding shares of Preferred Stock shall automatically be converted into shares of common stock, at the applicable conversion ratio then in effect, and (ii) such shares may not be reissued by the Company.

Dividends—     The holders of Preferred Stock are entitled to receive noncumulative dividends if and when declared by the Company’s board of directors. The Company may not declare, pay or set aside any dividends on shares of any other series of capital stock of the Company, other than dividends on common stock payable in common stock, unless the holders of the Preferred Stock first receive, or simultaneously receive, a dividend on each outstanding share of Preferred Stock. No dividends were declared as of June 30, 2021 and December 31, 2020 or paid during the three and six months ended June 30, 2021 and 2020.

Voting Rights—    The holders of Preferred Stock are entitled to vote, together with the holders of common stock as a single class, on matters submitted to stockholders for a vote. The holders of Preferred Stock are entitled to the number of votes equal to the number of shares of common stock into which each such share of Preferred Stock could convert.

Liquidation Preference—     While the Preferred Stock is not redeemable at the option of the holders, the shares are redeemable for cash in certain change of control events that are beyond the control of the Company. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, or deemed liquidation event (as

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described below), the holders of the Preferred Stock are entitled to receive a liquidation preference in priority over the holders of common stock, at an amount per share equal to the greater of i) the respective original Preferred Stock issue price plus any declared but unpaid dividends, or ii) the amount per share payable had all shares of Preferred Stock been converted to common stock immediately prior to such liquidation. If assets available for distribution are insufficient to satisfy the liquidation payment to holders in full, assets available for distribution will be allocated among holders based on their pro rata shareholdings. When holders are satisfied in full, any excess assets available for distribution will be allocated ratably among common stockholders based on their pro rata shareholdings.

Unless the holders of a majority of the then-outstanding shares of Preferred Stock, consenting or voting together as a single class, elect otherwise, a deemed liquidation event shall include a merger or consolidation (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation) or a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the Company.

11. Common Stock

The Company was authorized to issue up to 137,700,000 shares of common stock with a $0.001 par value per share as of December 31, 2020. In March 2021, the Company increased the authorized common stock shares issuable to 175,000,000.

The holders of common stock are entitled to one vote for each share of common stock. Subject to the payment in full of all preferential dividends to which the holders of the preferred stock are entitled, the holders of common stock shall be entitled to receive dividends out of funds legally available. In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the Company, after the payment or provision for payment of all debts and liabilities of the Company and all preferential amounts to which the holders of preferred stock are entitled with respect to the distribution of assets in liquidation, the holders of common stock shall be entitled to share ratably in the remaining assets of the Company available for distribution.

As of June 30, 2021, the Company has reserved an aggregate of 34,678,733 shares of common stock for the potential conversion of Series A, Series B and Series C Preferred Stock, which was automatically converted into common stock upon completion of the Company’s IPO, and 5,085,523 shares of common stock for the potential exercise of outstanding stock options under the 2017 Equity Incentive Plan (“2017 Plan”). Upon the effectiveness of the 2021 Incentive Award Plan (“2021 Plan”), the Company ceased granting awards under the 2017 Plan, and the 5,085,523 shares of common stock subject to outstanding stock options issued under the 2017 Plan may become available for future issuance under the 2021 Plan to the extent such stock options are forfeited.

12. Equity Incentive Plan

2017 Equity Incentive Plan

In June 2017, the Company’s board of directors adopted the 2017 Plan, which provided for the grant of qualified incentive stock options and nonqualified stock options, restricted stock or other awards to the Company’s employees and non-employees for the issuance or purchase of shares of the Company’s common stock. As of June 30, 2021, there were 855,627 shares of common stock available for future grants under the 2017 Plan and a total of 5,085,523 shares of the Company’s common stock were subject to outstanding stock options issued under the 2017 Plan.

The 2017 Plan is administered by the Company’s board of directors or a committee thereof to the extent the Company’s board of directors has delegated its power or authority under the 2017 Plan. The exercise prices, vesting and other restrictions are determined at the discretion of the board of directors, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the common stock on the date of grant. Stock options awarded under the 2017 Plan expire 10 years after the grant date unless the board of directors sets a shorter term. Incentive stock options and nonqualified stock options granted to employees and non-employees typically vest over four years. Certain stock options provide for accelerated vesting if there is a change in control, as defined in the 2017 Plan.

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The Company recorded stock-based compensation expense as research and development and general and administrative expenses in the statements of operations and comprehensive loss as follows (in thousands):

Stock Options

A summary of option activity under the 2017 Plan during the six months ended June 30, 2021 was as follows: