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, a 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 July ~~21, 2021,~~25, 2022, the registrant had ~~37,669,997~~52,127,032 shares of common stock outstanding.

	June 30, 2021			December 31, 2020			June 30, 2022			December 31, 2021
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	276,423		$	321,462		$	125,106		$	320,448
Marketable securities		3,035			6,679			273,112			85,095
Prepaid and other assets		7,851			3,537			6,033			5,598
Total current assets		287,309			331,678			404,251			411,141
Property and equipment, net		2,556			1,468			6,137			4,805
Restricted cash		251			251			251			251
Right-of-use asset								9,747			10,784
Other assets		407			501			415			599
Total assets	$	290,523		$	333,898		$	420,801		$	427,580
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities	$	8,538		$	7,745		$	20,552		$	14,085
Accrued compensation		3,303			3,152			4,687			8,940
Lease liabilities, current portion								3,068			1,769
Deferred revenue, current portion		4,497			3,690			5,380			4,864
Total current liabilities		16,338			14,587			33,687			29,658
Lease liabilities, net of current portion		914			938			8,753			9,960
Deferred revenue, net of current portion		8,791			12,150			4,010			6,532
Total liabilities		26,043			27,675			46,450			46,150
Commitments and contingencies (Note 8)
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $0.0001 par value; authorized shares – 40,000; issued and outstanding shares – 0ne		0			0
Common stock, $0.0001 par value; authorized shares – 400,000; issued and outstanding shares – 37,665 and 37,569 at June 30, 2021 and December 31, 2020, respectively		4			4
Common stock, $0.0001 par value; authorized shares – 400,000; issued and outstanding shares – 52,081 and 47,754 at June 30, 2022 and December 31, 2021, respectively								5			5
Additional paid-in capital		381,213			372,764			641,806			566,161
Accumulated other comprehensive loss		0			(5	)		(2,986	)		(187	)
Accumulated deficit		(116,737	)		(66,540	)		(264,474	)		(184,549	)
Total stockholders’ equity		264,480			306,223			374,351			381,430
Total liabilities and stockholders’ equity	$	290,523		$	333,898		$	420,801		$	427,580

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2021			2020			2022			2021			2022			2021
Collaboration revenue	$	2,607		$	1,541		$	5,311		$	2,899		$	2,178		$	2,607		$	3,973		$	5,311
Operating expenses:
Research and development		22,706			8,984			43,383			14,528			39,789			22,706			67,477			43,383
General and administrative		6,268			2,925			12,152			4,889			8,688			6,268			17,255			12,152
Total operating expenses		28,974			11,909			55,535			19,417			48,477			28,974			84,732			55,535
Loss from operations		(26,367	)		(10,368	)		(50,224	)		(16,518	)		(46,299	)		(26,367	)		(80,759	)		(50,224	)
Other income (expense):
Interest income		16			18			32			161			611			16			861			32
Interest expense		0			(131	)		0			(209	)
Change in fair value of preferred warrant liability		0			(75	)		0			(75	)
Other expense		(2	)		0			(5	)		0			(2	)		(2	)		(27	)		(5	)
Total other income (expense)		14			(188	)		27			(123	)
Total other income														609			14			834			27
Net loss		(26,353	)		(10,556	)		(50,197	)		(16,641	)		(45,690	)		(26,353	)		(79,925	)		(50,197	)
Other comprehensive income (loss):
Net unrealized gains on marketable securities		3			0			5			0
Net unrealized (losses) gains on marketable securities														(960	)		3			(2,799	)		5
Comprehensive loss	$	(26,350	)	$	(10,556	)	$	(50,192	)	$	(16,641	)	$	(46,650	)	$	(26,350	)	$	(82,724	)	$	(50,192	)
Net loss per share, basic and diluted	$	(0.70	)	$	(1.23	)	$	(1.34	)	$	(2.91	)	$	(0.92	)	$	(0.70	)	$	(1.63	)	$	(1.34	)
Weighted-average shares outstanding, basic and diluted		37,583			8,586			37,552			5,715			49,927			37,583			49,091			37,552

Condensed Statements of ~~Convertible Preferred Stock and~~ Stockholders' Equity ~~(Deficit)~~

	Convertible Preferred Stock				Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated			Total Stockholders’			Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital		Loss			Deficit			Equity			Shares		Amount		Capital		Loss			Deficit			Equity
Balance at December 31, 2020		—	$	—		37,569	$	4	$	372,764	$	(5	)	$	(66,540	)	$	306,223
Balance at December 31, 2021																					47,754	$	5	$	566,161	$	(187	)	$	(184,549	)	$	381,430
Issuance of common stock upon exercise of stock options		—		—		31		—		24		—			—			24			7		—		10		—			—			10
Vesting of early exercise options		—		—		—		—		10		—			—			10			—		—		1		—			—			1
Issuance of common stock in public offerings, net of issuance costs of $745																					1,520		—		24,103		—			—			24,103
Stock-based compensation		—		—		—		—		3,701		—			—			3,701			—		—		6,238		—			—			6,238
Net loss		—		—		—		—		—		—			(23,844	)		(23,844	)		—		—		—		—			(34,235	)		(34,235	)
Other comprehensive gain		—		—		—		—		—		2			—			2
Balance at March 31, 2021		—	$	—		37,600	$	4	$	376,499	$	(3	)	$	(90,384	)	$	286,116
Other comprehensive loss																					—		—		—		(1,839	)		—			(1,839	)
Balance at March 31, 2022																					49,281	$	5	$	596,513	$	(2,026	)	$	(218,784	)	$	375,708
Issuance of common stock upon exercise of stock options		—		—		51		—		98		—			—			98			5		—		4		—			—			4
Issuance of common stock in public offerings, net of issuance costs of $1,184																					2,746		—		38,281		—			—			38,281
Issuance of common stock under employee stock purchase plan		—		—		14		—		318		—			—			318			49		—		499		—			—			499
Vesting of early exercise options		—		—		—		—		9		—			—			9			—		—		1		—			—			1
Stock-based compensation		—		—		—		—		4,289		—			—			4,289			—		—		6,508		—			—			6,508
Net loss		—		—		—		—		—		—			(26,353	)		(26,353	)		—		—		—		—			(45,690	)		(45,690	)
Other comprehensive gain		—		—		—		—		—		3			—			3
Balance at June 30, 2021		—	$	—		37,665	$	4	$	381,213	$	—		$	(116,737	)	$	264,480
Other comprehensive loss																					—		—		—		(960	)		—			(960	)
Balance at June 30, 2022																					52,081	$	5	$	641,806	$	(2,986	)	$	(264,474	)	$	374,351

Condensed Statements of ~~Convertible Preferred Stock and~~ Stockholders' Equity ~~(Deficit)~~

Convertible Preferred Stock

Common Stock

Additional
Paid-in

Accumulated
Other
Comprehensive

Accumulated

Total
Stockholders’

Shares

Amount

Shares

Amount

Capital

Loss

Deficit

Equity (Deficit)

Balance at December 31, 2019

37,267

$
134,720

2,989
��

$
—

$
(43,172
)

$
—

$
(22,185
)

$
(65,357
)
Issuance of common stock upon exercise
   of stock options, net of repurchases

—

—

41

—

16

—

—

16

Vesting of early exercise options

—

—

—

—

14

—

—

14

Issuance of Series C convertible preferred
   stock, net of issuance costs of $100

538

2,200

—

—

—

—

—

—

Stock-based compensation

—

—

—

—

449

—

—

449

Net loss

—

—

—

—

—

—

(6,085
)

(6,085
)
Balance at March 31, 2020

37,805

$
136,920

3,030

$
—

$
(42,693
)

$
—

$
(28,270
)

$
(70,963
)
Vesting of early exercise options

—

—

—

—

34

—

—

34

Issuance of common stock in initial public
   offering, net of issuance costs of $24,026

—

—

16,560

2

274,052

—

—

274,054

Conversion of convertible preferred stock
   into common stock upon completion of
   initial public offering

(37,805
)

(136,920
)

17,921

2

136,918

—

—

136,920

Reclassification of warrant liability to equity
   due to adjustment from preferred stock
   warrant to common stock warrant upon
   completion of initial public offering

—

—

—

—

120

—

—

120

Cashless exercise of common stock warrants

—

—

16

—

—

—

—

—

Stock-based compensation

—

—

—

—

687

—

—

687

Net loss

—

—

—

—

—

—

(10,556
)

(10,556
)
Balance at June 30, 2020

—

$
—

37,527

$
4

$
369,118

$
—

$
(38,826
)

$
330,296

	Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Shares		Amount		Capital		Loss			Deficit			Equity
Balance at December 31, 2020		37,569	$	4	$	372,764	$	(5	)	$	(66,540	)	$	306,223
Issuance of common stock upon exercise of stock options		31		—		24		—			—			24
Vesting of early exercise options		—		—		10		—			—			10
Stock-based compensation		—		—		3,701		—			—			3,701
Net loss		—		—		—		—			(23,844	)		(23,844	)
Other comprehensive gain		—		—		—		2			—			2
Balance at March 31, 2021		37,600	$	4	$	376,499	$	(3	)	$	(90,384	)	$	286,116
Issuance of common stock upon exercise of stock options		51		—		98		—			—			98
Issuance of common stock under employee stock purchase plan		14		—		318		—			—			318
Vesting of early exercise options		—		—		9		—			—			9
Stock-based compensation		—		—		4,289		—			—			4,289
Net loss		—		—		—		—			(26,353	)		(26,353	)
Other comprehensive gain		—		—		—		3			—			3
Balance at June 30, 2021		37,665	$	4	$	381,213	$	—		$	(116,737	)	$	264,480

	Six Months Ended June 30,						Six Months Ended June 30,
	2021			2020			2022			2021
Cash flows from operating activities
Net loss	$	(50,197	)	$	(16,641	)	$	(79,925	)	$	(50,197	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		255			157			636			255
Stock-based compensation expense		7,990			1,136			12,746			7,990
Amortization of premiums and discounts on marketable securities, net		69			0			223			69
Amortization of discounts and loan issuance costs		0			29
Gain on disposal of property and equipment		(16	)		0			0			(16	)
Noncash interest expense		0			110
Change in fair value of preferred warrant liability		0			75
Changes in operating assets and liabilities:
Prepaid and other assets		(4,394	)		(392	)		(251	)		(4,394	)
Accounts payable and accrued liabilities		579			1,908			6,582			579
Accrued compensation		151			5			(4,253	)		151
Operating lease right-of-use assets and liabilities, net		299			2			1,128			299
Deferred revenue		(2,552	)		(1,320	)		(2,006	)		(2,552	)
Net cash used in operating activities		(47,816	)		(14,931	)		(65,120	)		(47,816	)
Cash flows from investing activities
Maturities of marketable securities		3,580			0			21,525			3,580
Purchases of marketable securities								(212,564	)		0
Purchases of property and equipment		(1,233	)		(10	)		(2,080	)		(1,233	)
Net cash provided by (used in) investing activities		2,347			(10	)
Net cash (used in) provided by investing activities								(193,119	)		2,347
Cash flows from financing activities
Proceeds from issuance of common stock in initial public offering, gross		0			298,080
Payment of issuance costs related to initial public offering		0			(22,680	)
Proceeds from exercise of stock options, net of repurchases		122			16
Proceeds from issuance of common stock in public offerings, gross								64,313			0
Payment of issuance costs related to public offerings								(1,929	)		0
Proceeds from issuance of common stock under employee stock purchase plan		318			0			499			318
Payments on long-term debt		0			(4,683	)
Proceeds from issuance of Series C convertible preferred stock, net of issuance costs		0			2,200
Proceeds from exercise of stock options								14			122
Payment of deferred financing costs		(10	)		0			0			(10	)
Net cash provided by financing activities		430			272,933			62,897			430
Net (decrease) increase in cash, cash equivalents and restricted cash		(45,039	)		257,992
Net decrease in cash, cash equivalents and restricted cash								(195,342	)		(45,039	)
Cash, cash equivalents and restricted cash at beginning of period		321,713			94,578			320,699			321,713
Cash, cash equivalents and restricted cash at end of period	$	276,674		$	352,570		$	125,357		$	276,674

Supplemental disclosure of cash flow information:
Cash paid for interest	$	0		$	571
Supplemental schedule of noncash investing and financing activities:
Right-of-use assets obtained in exchange for operating lease liabilities	$	0		$	676
Costs incurred, but not paid, in connection with initial public offering costs included in accounts payable and accrued liabilities	$	0		$	1,346
Costs incurred, but not paid, in connection with deferred financing costs included in accounts payable and accrued liabilities	$	90		$	0		$	0		$	90
Costs incurred, but not paid, in connection with purchases of property and equipment included in accounts payable and accrued liabilities	$	94		$	287		$	0		$	94
Conversion of convertible preferred stock into common stock upon completion of initial public offering	$	0		$	136,920
Reclassification of warrant liability to equity due to adjustment from preferred stock warrant to common stock warrant upon completion of initial public offering	$	0		$	120

Avidity Biosciences, Inc. (the Company or Avidity) is a biopharmaceutical company committed to delivering a new class of RNA therapeutics called Antibody Oligonucleotide Conjugates (AOCs). The Company’s proprietary AOC platform is designed to combine the specificity of monoclonal antibodies with the precision of ~~oligonucleotide therapies~~RNA therapeutics to target the root cause of diseases previously untreatable with ~~RNA~~such therapeutics.

On June 16, 2020, the Company completed its initial public offering (IPO) in which it sold 16,560,000 shares of common stock at an offering price of $18.00 per share. Proceeds from the IPO, net of underwriting discounts, commissions and offering costs, were $274.1 million.

~~In addition, each of the following occurred in connection with the completion of the IPO:~~

On ~~June 4, 2020,~~August 6, 2021, the Company ~~effected~~completed a ~~one-for-2.1095 reverse stock split~~public offering of 9,200,000 shares of its common stock at a public offering price of $18.00 per share. The net proceeds from the offering were $155.1 million, after deducting underwriting discounts, commissions and offering costs. On July 2, 2021, the Company entered into a sales agreement (the ~~Reverse Stock Split). The par value~~Sales Agreement) with Cowen and Company, LLC (the Sales Agent), under which the ~~authorized~~Company may, from time to time, sell shares of ~~the~~its common stock ~~were not adjusted as a result~~having an aggregate offering price of up to $150.0 million through the ~~Reverse Stock Split. All issued and outstanding~~Sales Agent. Through June 30, 2022, the Company has sold 5,046,860 shares of its common stock pursuant to the Sales Agreement and received net proceeds of $82.0 million, after deducting offering-related transaction costs and commissions. See Note 8 (Stockholders Equity) for more information on the ~~conversion ratio of the convertible preferred stock have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented.~~Company’s equity offerings.

~~As of June 30, 2021,~~To date, the Company has devoted substantially all of its resources to organizing and staffing the ~~company,~~Company, business planning, raising capital, developing its proprietary AOC platform, identifying potential product candidates, establishing its intellectual property portfolio, ~~and~~ conducting research, preclinical and ~~preclinical~~clinical studies, and providing other general and administrative support for these operations. In addition, the Company has a limited operating history, has incurred operating losses since inception and expects that it will continue to incur net losses into the foreseeable future as it continues the development of its product candidates and development programs. As of June 30, ~~2021,~~2022, the Company had an accumulated deficit of ~~$116.7~~$264.5 million and cash, cash equivalents and marketable securities of ~~$279.5~~$398.2 million.

The Company believes that existing cash, cash equivalents and marketable securities will be sufficient to fund the Company’s operations for at least 12 months from the date of the filing of this Form 10-Q. The Company plans to finance its future cash needs through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. If the Company is not able to secure adequate additional funding, it may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or delay or reduce the scope of its planned development programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects.

The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited interim condensed financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, ~~2020~~2021 included in the Company’s annual report on Form 10-K filed with the SEC on March ~~15, 2021.~~1, 2022.

The Company’s condensed financial statements are prepared in accordance with GAAP, which requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the condensed financial statements and

accompanying notes. The most significant estimates in the Company’s condensed financial statements relate to revenue recognition, stock-based compensation, and accrued research and development costs. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may ultimately materially differ from these estimates and assumptions.

The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts. Restricted cash represents cash held as collateral for the letter of credit required under the Company’s facility lease and is reported as a long-term asset in the accompanying condensed balance sheets.

The Company’s marketable securities primarily consist of U.S. Government and corporate debt securities. The Company classifies its marketable securities as available-for-sale and records such assets at estimated fair value in the condensed balance sheets, with unrealized gains and losses, if any, reported as a component of other comprehensive income (loss) within the condensed statements of operations and comprehensive loss and as a separate component of stockholders’ equity. The Company classifies marketable securities with remaining maturities greater than one year as current assets because such marketable securities are available to fund the Company’s current operations. Realized gains and losses are calculated on the specific identification method and recorded as interest income. There were 0 realized gains and losses during any of the periods presented.

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. When the Company determines that a decline in the fair value below its cost basis is other-than-temporary, the Company recognizes an impairment loss in the period in which the other-than-temporary decline occurred. There have been 0 other-than-temporary impairments recognized during any of the periods presented.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash balances due to the financial position of the depository institutions in which those deposits are held. Additionally, the Company has established guidelines regarding approved investments, credit quality, diversification, liquidity and maturities of investments, which are designed to maintain safety and liquidity.

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

None of the Company’s non-financial assets are recorded at fair value on a non-recurring basis. The carrying amounts reflected in the Company’s condensed balance sheets for prepaid and other assets and accounts payable and accrued liabilities approximate their fair values due to their short-term nature. ~~The carrying value of the Company’s previously outstanding debt approximated fair value due to the interest being reflective of then-current market rates for debt with similar terms and conditions.~~ The Company recognizes transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. NaN transfers between levels have occurred during the periods presented.

See Note 3 (Fair Value Measurements) for information on assets measured at fair value.

Property and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are recorded using the straight-line method over the estimated useful lives of the related assets, which ranges from three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining lease term. Repairs and maintenance charges that do not increase the useful life of the assets are charged to operating expenses as incurred.

Long-lived assets consist of property and equipment. An impairment loss is recorded if and when events and circumstances indicate that assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. The Company has not recognized any impairment losses in any of the periods presented in these condensed financial statements.

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by management in making decisions regarding resource allocation and assessing performance. The Company manages its operations as a single operating segment in the United States for the purposes of assessing performance and making operating decisions.

To date, all the Company’s revenue has been derived from collaboration and research agreements. The terms of these arrangements include the following types of payments to the Company: non-refundable, upfront license fees; development, regulatory and commercial milestone payments; payments for research and development services provided by the Company or for manufacturing supply services the Company provides through its contract manufacturers; and royalties on net sales of licensed products.

The Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation.

The Company receives payments from its collaborators based on billing schedules established in each contract. Upfront and other payments may require deferral of revenue recognition to a future period until the Company performs its obligations under its research and collaboration arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional.

See Note 5 (Collaboration, License and Research Agreements) for further information.

Research and development costs are expensed as incurred and include salaries, benefits and stock-based compensation associated with research and development personnel, third-party research and development expenses, license fees, laboratory supplies, facilities, overhead costs, and consultants. Nonrefundable advance payments for goods and services that will be used in future research and development activities are capitalized and recorded as expense in the period that the Company receives the goods or when services are performed.

Upfront and milestone payments to acquire contractual rights to licensed technology are ~~recorded~~expensed when incurred if there is uncertainty in the Company receiving future economic benefit from the acquired contractual rights.

Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.

The Company accounts for income taxes in accordance with Accounting Standards Codification (ASC) 740, Income Taxes, which provides for deferred taxes using the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are provided, if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit would more likely than not be realized assuming examination by the taxing authority. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances.

The Company is subject to taxation in the United States and various state jurisdictions. As of December 31, ~~2020,~~2021, the Company’s tax years since conversion to a corporation in 2019 are subject to examination by taxing authorities.

Stock-based compensation expense for employee and non-employee stock option grants is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period (usually the vesting period) of the stock-based award, ~~net of actual~~and forfeitures ~~during the period.~~are recognized as incurred. Stock-based compensation expense for employee stock purchases under the Company’s Employee Stock Purchase Plan (the ESPP) is recorded at the estimated fair value of the purchase as of the plan enrollment date and is recognized as expense on a straight-line basis over the applicable six-month ESPP offering period. The estimation of fair value for stock-based compensation requires management to make estimates and judgments about, among other things, the estimated life of options and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities. Comprehensive gains (losses) have been reflected in the statements of operations and comprehensive loss for all periods presented.

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, adjusted for the weighted-average number of common shares outstanding that are subject to repurchase or forfeiture. The Company has excluded ~~38,118~~11,449 and ~~130,302~~38,118 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~48,080~~12,705 and ~~153,722~~48,080 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be ~~anti-dilutive due to the Company’s net loss position.~~anti-dilutive.

Potentially dilutive securities not included in the calculation of diluted net loss per share, because to do so would be anti-dilutive, are as follows (in common stock equivalent shares; in thousands):

~~In August 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-06,~~ ~~Debt—Debt with Conversion and Other Options (Subtopic 470-20)~~ ~~and~~ ~~Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity~~, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Specifically, ASU 2020-06 simplifies accounting for the issuance of convertible instruments by removing certain separation models required under existing guidance. In addition, the ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and amends the diluted earnings-per-share (EPS) calculation guidance in certain areas to improve the consistency of EPS calculations. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. The Company early adopted the new standard, effective January 1, 2021, on a modified retrospective basis. The adoption of ASU 2020-06 had no impact on the Company's financial statements and related disclosures.

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that are adopted by the Company as of the specified effective date. ~~The~~Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Statements (Topic 326), which intends to improve financial reporting by requiring earlier recognition of credit losses on certain financial assets, such as available-for-sale debt securities. Subsequent to the issuance of ASU 2016-13, the FASB issued several additional Accounting Standard Updates (ASUs) to clarify implementation guidance, provide narrow-scope improvements and provide additional disclosure guidance. In November 2019, the FASB issued an amendment making this ASU effective for fiscal years beginning after December 15, 2022 for smaller reporting companies. The Company was a smaller reporting company at the determination date, and therefore the new standard will be effective for the Company on January 1, 2023. The Company is currently evaluating the potential impact that the adoption of ASU 2016-13 may have on its financial statements and related disclosures.

The Company determines the fair value of its ~~cash equivalents and~~ marketable securities based on one or more valuations from its investment accounting and reporting service provider. The investment service provider values the securities using a hierarchical security pricing model that relies primarily on valuations provided by an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets, yield curves, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, and broker and dealer quotes, as well as other relevant economic measures.

The following tables summarize the Company’s ~~cash equivalents and~~ marketable securities measured at fair value (in thousands):

The Company’s marketable securities, which consist of highly liquid ~~investment grade~~marketable debt securities, are classified as available-for-sale and are stated at fair value. The following tables summarize the Company’s marketable securities (in thousands):

The unrealized losses on the Company’s marketable securities of $3.0 million as of June 30, 2022 were caused by interest rate increases which resulted in the decrease in market value of these securities. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those marketable securities to be other-than-temporarily impaired at June 30, 2022. NaNne of the Company’s marketable securities have been in a continuous unrealized loss position for 12 months or greater as of June 30, 2022.

In April 2019, the Company entered into a Research Collaboration and License Agreement (the Lilly Agreement) with Eli Lilly and Company (Lilly) for the discovery, development and commercialization of AOC products directed against certain targets in immunology and other select indications on a worldwide basis. Under the Lilly Agreement, the Company granted Lilly an exclusive, worldwide, royalty-bearing license, with the right to sublicense (subject to certain conditions), under the Company’s technology to research, develop, manufacture and sell products containing AOCs that are directed to up to 6 mRNA targets. The Company retains the right to use its technology to perform its obligations under the Lilly Agreement and for all purposes not granted to Lilly. The Company agreed that it will not, itself or with a third party, research, develop,

manufacture or commercialize or otherwise exploit any compound or product directed against targets subject to the Lilly Agreement.

In consideration of the rights granted to Lilly under the Lilly Agreement, the Company received a one-time upfront fee of $20.0 million and is eligible to receive up to $60.0 million in development milestone payments, up to $140.0 million in regulatory milestone payments and up to $205.0 million in commercialization milestone payments per target. In addition, Lilly is obligated to reimburse the Company for research expenses, as defined in and incurred under the Lilly Agreement. Lilly is obligated to pay the Company a tiered royalty ranging from the mid-single to low-double digits on worldwide annual net sales of licensed products, subject to specified and capped reductions for the market entry of biosimilar products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory. Lilly’s royalty obligations and the Lilly Agreement will expire on a licensed product-by-licensed product and country-by-country basis on the later of ten years from the date of the first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.

The Company has identified multiple promises to deliver goods and services, which include at inception of the agreement: (i) a license to technology and patents, information and know-how; and (ii) collaboration, including research services, technical and regulatory support provided by the Company. At inception and through June 30, ~~2021,~~2022, the Company has identified 1 performance obligation for all the deliverables under the Lilly Agreement since the delivered elements are either not capable of being distinct or are not distinct within the context of the contract. Accordingly, the Company will recognize revenue for the fixed or determinable collaboration in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the five-year period over which it expects to deliver its performance obligations. The Company periodically reviews and updates the estimated collaboration expenses, when appropriate, which adjusts the percentage of revenue that is recognized for the period. In connection with the Lilly Agreement, the Company recognized revenue of ~~$2.5~~$2.1 million and ~~$1.5~~$2.5 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$5.1~~$3.8 million and ~~$2.9~~$5.1 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and had deferred revenue of ~~$13.3~~$9.2 million and ~~$15.8~~$11.1 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Collaboration receivables related to the Lilly Agreement were ~~$1.4~~$1.1 million and ~~$1.2~~$0.9 million as of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, which are included in prepaid and other assets on the condensed balance sheets.

A reconciliation of the closing balance of deferred revenue related to the Lilly Agreement is as follows (in thousands):

Concurrently with the execution of the Lilly Agreement, the Company issued a convertible promissory note to Lilly (the Lilly Note) and received cash proceeds of $15.0 million. In connection with the Series C financing in November 2019, all outstanding principal and interest accrued under the Lilly Note converted into 4,576,342 shares of Series C convertible preferred stock, which subsequently converted into 2,169,396 shares of common stock in connection with the IPO in June 2020.

In December 2020, the Company entered into a research collaboration (the MyoKardia Agreement) with MyoKardia, Inc. (MyoKardia), a wholly-owned subsidiary of Bristol Myers Squibb, to demonstrate the potential utility of AOCs in cardiac tissue by leveraging MyoKardia’s genetic cardiomyopathy platform including, among other aspects, its novel target discovery engine and proprietary cardiac disease models. In connection with the MyoKardia Agreement, the Company recognized revenue of $40.5 thousand and $0.1 million for the three months ended June 30, 2022 and 2021, respectively, and $0.1 million and $0.2 million for the ~~three and~~ six months ended June 30, 2022 and 2021, respectively.

Depreciation expense related to property and equipment was ~~$0.1~~$0.3 million and $0.1 million for the three months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~$0.3~~$0.6 million and ~~$0.2~~$0.3 million for the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

In June 2017, the Company entered into an amendment (the LSA Amendment) to the Amended and Restated Loan and Security Agreement (as amended, the LSA) with Silicon Valley Bank (SVB). Pursuant to the LSA Amendment, SVB agreed to make loans of up to $7.0 million, comprising (i) a $5.0 million term loan, funded at the closing date (the Term C Loan), and (ii) subject to the achievement of a specified milestone relating to the Company’s research, an additional term loan totaling up to $2.0 million (the Term D Loan), of which $4.1 million was used to repay the Company’s existing loan with SVB, in addition to the final payments totaling $0.4 million.

The Term C Loan was scheduled to mature on June 1, 2021 and bore interest at an adjustable annual rate of the prime rate per the Wall Street Journal plus one-fifth of one percent (0.20%). The LSA Amendment provided an extension of the interest only period through June 1, 2019, upon the Term D Loan advance. Beginning July 1, 2019, the Company was required to repay the principal amount in 36 equal monthly installments, in addition to the monthly interest payment. In addition, a final payment of 6.5% of the funded amount, or $0.3 million, was due on the maturity date. The final payment fee was accrued as interest expense over the term of the loan and recorded in long-term debt, net of current portion.

In August 2018, the Company entered into a second amendment to the LSA (the LSA Second Amendment). Pursuant to the LSA Second Amendment, SVB provided the Term D Loan of $2.0 million, upon the Company’s receipt of $3.0 million in convertible note financing. In addition, a final payment of 6.5% of the funded amount, or $0.1 million, was due on the maturity date. The Company accounted for the financing prospectively as a debt modification.

On June 30, 2020, the Company voluntarily prepaid the aggregate outstanding principal balance of $2.8 million and final payments and accrued interest of $0.5 million related to the Term C and Term D Loans, and the LSA was terminated.

In conjunction with the Term A and Term B Loans, the Company issued a warrant to SVB to purchase up to 16,474 shares of Series A convertible preferred stock at an exercise price of $2.2615 per share, exercisable at any time following the issuance, with a term of ten years. In connection with the completion of the IPO in June 2020, the preferred stock warrant was adjusted to become a warrant exercisable for 7,809 shares of common stock at an exercise price of $4.77 per share. In conjunction with the Term C Loan entered into in June 2017, the Company issued a warrant to SVB to purchase up to 9,442 shares of common stock at an exercise price of $0.53 per share, exercisable at any time following the issuance, with a term of seven years. The Company estimated the fair value of the warrants granted using the Black-Scholes model and recorded the fair value as debt discounts, which were being amortized to interest expense using the effective interest method over the term of the loans. On June 17, 2020, the warrants were cashless exercised for an aggregate of 15,833 shares of common stock.

The Company determines if an arrangement is a finance lease, operating lease or short-term lease at inception, or as applicable, and accounts for the arrangement under the relevant accounting literature.

During the periods presented, the Company was party to various non-cancellable office and laboratory space operating leases and short-term leases. Currently, the Company is only party to a non-cancellable office and laboratory space operating ~~leases, as well as short-term office and laboratory space leases.~~lease. Under the relevant guidance, the Company recognizes operating lease right-of-use (ROU) assets and liabilities based on the present value of the future minimum lease payments over the lease term at the commencement date, using the Company’s assumed incremental borrowing rate, ~~of 5.5%,~~ and amortizes the ROU assets and liabilities over the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term. ~~The Company’s short-term~~Short-term leases are not subject to recognition of an ROU asset or liability or straight-line lease expense requirements.

In March 2014, the Company entered into a non-cancellable operating lease for office and laboratory space with a lease term through November 2017. In July 2017, the Company entered into an amendment to this lease to extend the lease term through December 2021.

On June 1, 2020, the Company entered into a second amendment to its existing operating lease (as amended, the 2014 Lease) and entered into a new non-cancellable temporary operating lease in connection with a newly executed non-cancellable operating lease for its new headquarters location, with a projected commencement date of July 1, 2021.

On December 18, 2020, the Company entered into an amendment to the non-cancellable operating lease for its new headquarters location (as amended, the New Lease), which increased the square footage by adding adjacent space and extended the projected commencement date to November 1, 2021. Additionally, the non-cancellable temporary operating lease was amended (as amended, the Temporary Lease) to accommodate the projected commencement date of the New Lease. The lease term under both the 2014 Lease and the Temporary Lease ends 15 days after the commencement date of the New Lease in November 2021. The remaining monthly rental payments under the 2014 Lease and the rent under the Temporary Lease were abated beginning on June 1, 2020, given the execution of the New Lease. The New Lease has a ~~five-year~~ term upon commencement in November 2021 and a renewal option for an additional five years. Under the terms of the New Lease, the initial monthly base rent of approximately $251,000 will increase to approximately $282,000 during the last year of the New Lease's initial term, and the first year includes five months of rent abatement. The total lease payments under the initial term of the New Lease of $14.7 million were allocated amongst the 2014 Lease, Temporary Lease and New Lease based on the relative standalone price of the separate lease components. Furthermore, pursuant to the terms of the New Lease, the Company is required to maintain a letter of credit totaling $251,000 throughout the lease term.

In June 2020, in accordance with the lease terms applicable at that time, the Company adjusted the ROU asset and liability of the 2014 Lease to conform to the modification terms and recorded an ROU asset and liability for the Temporary Lease upon occupancy. In December 2020, in connection with the lease amendments described above, the Company adjusted the ROU asset and liability of the 2014 Lease and Temporary Lease to conform to the modification terms. The Company will recognize an ROU asset and liability related to the New Lease upon obtaining control of the asset, which is expected to occur upon occupancy of the new space in November 2021.

As of June 30, ~~2021,~~2022, future minimum payments for the Company’s ~~ROU assets and~~operating lease liabilities ~~related to the 2014 Lease and the Temporary Lease~~ are as follows (in thousands):

~~As of June 30, 2021, maturities of the lease liabilities due under the 2014 Lease and the Temporary Lease are as follows (in thousands):~~

Supplemental cash flow information related to cash paid for amounts included in the measurement of operating lease liabilities was as follows (in thousands):

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. There are 0 matters currently outstanding for which any liabilities have been accrued.

On June 16, 2020, the Company’s certificate of incorporation was amended and restated to authorize 400,000,000 shares of common stock and 40,000,000 shares of undesignated preferred stock, each with a par value of $0.0001 per share. There was 0 preferred stock issued for any of the periods presented in the condensed financial statements.

On June 16, 2020, the Company completed its IPO in which it sold 16,560,000 shares of common stock at an offering price of $18.00 per share. Proceeds from the IPO, net of underwriting discounts, commissions and offering costs, were $274.1 million.

On ~~April 1, 2019, Avidity Biosciences LLC (Avidity LLC), a Delaware limited liability company, was converted~~July 2, 2021, the Company entered into Avidity Biosciences, Inc., a Delaware corporation. The entire membership interests of Avidity LLC were converted into securities of Avidity Biosciences, Inc. as follows: (i) each outstanding common unit of Avidity LLC was converted into 1 share of Avidity Biosciences, Inc.’s common stock; (ii) each outstanding Series A convertible preferred unit of Avidity LLC converted into 1 share of Avidity Biosciences, Inc.’s Series A convertible preferred stock; and (iii) each outstanding Series B convertible preferred unit of Avidity LLC converted into 1 share of Avidity Biosciences, Inc.’s Series B convertible preferred stock. All the property, rights, privileges, powers and franchises of Avidity LLC vested in Avidity Biosciences, Inc., and all debts, liabilities and duties of Avidity LLC became debts, liabilities and duties of Avidity Biosciences, Inc. All referencesSales Agreement with the Sales Agent, under which the Company may, from time to ~~the former members’ equity accounts in Avidity LLC have been adjusted to reflect the equivalent number of Avidity Biosciences, Inc.’s~~time, sell shares of its common ~~stock. Upon completion~~stock having an aggregate offering price of up to $150.0 million through the ~~conversion, the Company reclassified an accumulated deficit of $44.1 million from predecessor deficit to additional paid-in capital.~~

~~In connection with the completion of the IPO in June 2020, all of the outstanding shares of convertible preferred stock were converted into 17,921,069 shares~~Sales Agent. Sales of the Company’s common ~~stock. Prior~~stock made pursuant to ~~conversion,~~the Sales Agreement are made under the Company’s ~~convertible preferred~~shelf registration statement on Form S-3, which became automatically effective upon filing on July 2, 2021 (the Shelf Registration Statement). In addition, the Sales Agreement may be terminated by the Company or the Sales Agent at any time upon ten days’ notice to the other party, or by the Sales Agent, with respect to itself, at any time in certain circumstances, including the occurrence of a material adverse change. During the six months ended June 30, 2022, the Company sold 4,266,311 shares of its common stock ~~was classified as temporary equity~~pursuant to the Sales Agreement and received net proceeds of $62.4 million, after deducting offering-related transaction costs and commissions. Through June 30, 2022, the Company has sold 5,046,860 shares of its common stock pursuant to the Sales Agreement and received net proceeds of $82.0 million, after deducting offering-related transaction costs and commissions. See Note 10 (Subsequent Events) for information on additional shares sold after June 30, 2022.

On August 6, 2021, the Company completed a public offering of 9,200,000 shares of its common stock at a public offering price of $18.00 per share. The net proceeds from the offering were $155.1 million, after deducting underwriting discounts, commissions and offering costs.The shares sold in ~~accordance with authoritative guidance for~~ the ~~classification and measurement of potentially redeemable securities whose redemption is based upon certain change in control events outside of~~offering were registered pursuant to the Company’s ~~control.~~Shelf Registration Statement.

In January 2013, the Company adopted the 2013 Equity Incentive Plan (the 2013 Plan). The 2013 Plan provided for the issuance of incentive units to employees and nonemployees of the Company and non‑statutory unit options, restricted unit awards, unit appreciation rights, and unit bonuses to directors, employees and consultants of the Company. Under the 2013 Plan, 2,127,013 units were initially reserved for issuance. Upon the conversion of the Company to a C corporation, the 2013 Plan continued on the same terms and conditions. In 2019, the number of shares reserved under the 2013 Plan was increased to 4,771,615 shares.

In June 2020, the Company’s board of directors adopted, and the Company’s stockholders approved, the 2020 Incentive Award Plan (the 2020 Plan), which became effective in connection with the IPO. Pursuant to the 2020 Plan, the Company ceased granting awards under the 2013 Plan. Under the 2020 Plan, the Company may grant stock options, restricted stock, dividend equivalents, restricted stock units, stock appreciation rights, and other stock or cash-based awards to individuals who are then employees, officers, non-employee directors or consultants of the Company. A total of 3,900,000 shares of common stock were initially reserved for issuance under the 2020 Plan. In addition, the number of shares of

common stock available for issuance under the 2020 Plan will be increased annually on the first day of each fiscal year during the term of the 2020 Plan, beginning with the 2021 fiscal year, by an amount equal to the lesser of (a) 5% of the shares of common stock outstanding on the final day of the immediately preceding calendar year or (b) such smaller number of shares as determined by the Company’s board of directors. At June 30, ~~2021, 2,669,735~~2022, 2,092,732 shares remain available for issuance under the 2020 Plan.

Options granted from the 2013 Plan and 2020 Plan are exercisable at various dates and will expire no more than ten years from their date of grant. Options generally vest over a ~~two- to~~ four-year period. Prior to the IPO, the exercise price of options was determined by the Company’s board of directors. Following the IPO, the Company grants options with an exercise price equal to the fair market value of the Company’s stock on the date of the option grant.

Stock option activity for employee and nonemployee awards and related information is as follows (in thousands, except per share data):

The weighted-average grant date fair value of options granted during the six months ended June 30, 2022 and 2021 were $10.71 and ~~2020 were~~ $17.08 ~~and $5.14~~ per share, respectively.

In June 2020, the Company adopted the ESPP, which permits participants to contribute up to 15% of their eligible compensation during defined rolling six-month periods to purchase the Company’s common stock. The purchase price of the shares will be 85% of the lower of the fair market value of the Company’s common stock on the first day of trading of the offering period or on the applicable purchase date. The Company issued ~~14,235~~48,760 and 014,235 shares of common stock under the ESPP during the six months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company had an outstanding liability of ~~$39,000~~$40.2 thousand at June 30, ~~2021,~~2022, which is included in accounts payable and accrued liabilities on the condensed balance sheet, for employee contributions to the ESPP for shares pending issuance at the end of the offering period. As of June 30, ~~2021, 657,475~~2022, 589,803 shares of common stock were available for issuance under the ESPP.

The assumptions used in the Black-Scholes model to determine the fair value of stock option grants and shares purchasable under the ESPP were as follows:

The allocation of stock-based compensation expense was as follows (in thousands):

As of June 30, ~~2021,~~2022, the unrecognized compensation cost related to outstanding time-based options was ~~$55.0~~$65.8 million, which is expected to be recognized over a weighted-average period of ~~3.0~~2.8 years. As of June 30, ~~2021,~~2022, the unrecognized compensation cost related to stock purchase rights under the ESPP was $0.2 million, which is expected to be recognized over a weighted-average period of 0.5 years.

The COVID-19 outbreak in the United States has caused significant business disruption. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the continued spread of COVID-19 and the measures taken by the governmental authorities, and its impact on the Company’s preclinical studies and clinical trials, employees and vendors, all of which are uncertain and cannot be predicted, particularly as the Company advances its product candidates into and through clinical development. In ~~response to the COVID-19 outbreak,~~December 2021, the Company ~~limited the number of on-site staff in its research laboratories as well as other personnel,~~transitioned to a hybrid model with ~~the remainder of~~ its employees ~~continuing~~generally working both remotely and onsite, and the Company anticipates it will continue to ~~work remotely.~~use this model going forward. To date, the Company has not experienced material disruptions in its business operations. However, a prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company, including the timing and ability of the Company to complete certain clinical trials and other efforts required to advance the development of its product candidates and raise additional capital.

OnFrom July ~~2, 2021,~~1, 2022 through August 9, 2022, the Company ~~entered into a sales agreement (the Sales Agreement) with Cowen and Company, LLC (the Sales Agent), under which the Company may, from time to time, sell~~sold 1,042,300 shares of its common stock having an aggregate offering price of up to $150.0 million through the Sales Agent. Sales of the Company’s common stock made pursuant to the Sales Agreement, if any, will be made under the Company’s shelf registration statement on Form S-3, which became automatically effective upon filing on July 2, 2021 (the Shelf Registration Statement). The Company is not obligated to, and cannot provide any assurances that it will, make any sales of the shares under the Sales Agreement. In addition, the Sales Agreement may be terminated by the Company or the Sales Agent at any time upon ten days’ notice to the other party, or by the Sales Agent, with respect to itself, at any time in certain circumstances, including the occurrence of a material adverse change. To date, there have been 0 sales of common stock pursuant to the Sales ~~Agreement.~~

~~On August 6, 2021, the Company completed a public offering of 9,200,000 shares of its common stock at a public offering price of $18.00 per share. The~~Agreement and received net proceeds ~~from the offering were approximately $155.3~~of $18.7 million, after deducting ~~underwriting discounts, commissions~~offering-related transaction costs and ~~estimated offering costs.The shares sold in the offering were registered pursuant to the Company’s Shelf Registration Statement.~~commissions.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q and with our audited financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations, both of which are contained in our annual report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission, or SEC, on March ~~15, 2021.~~1, 2022.

This quarterly report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or 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 strategies and plans, research and development plans, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and ~~planned~~ clinical trials for our product candidates, the timing and likelihood of regulatory filings and approvals for our product candidates, the impact of COVID-19 on our business, the timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated product development efforts, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These forward-looking statements are only predictions. We have based these forward-looking statements 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 risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors.” 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. 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.

We are a biopharmaceutical company committed to delivering a new class of RNA therapeutics called Antibody Oligonucleotide Conjugates, or ~~AOCs~~^TM.AOCs. Our proprietary AOC platform is designed to combine the specificity of monoclonal antibodies, or mAbs, with the precision of ~~oligonucleotide therapies~~RNA therapeutics to target the root cause of diseases previously untreatable with ~~RNA~~such therapeutics. We are initially focused on muscle diseases to demonstrate the capabilities of our AOCs, and ~~our~~we expect to have three muscle ~~franchise consists~~programs in clinical development by the end of ~~over five programs.~~2022. Our lead product candidate, AOC 1001, is designed to treat myotonic dystrophy type 1, or DM1, a rare monogenic muscle disease. ~~In July 2021,~~AOC 1001 is currently in clinical testing with the ~~U.S. Food and Drug Administration, or FDA, cleared us to proceed with our~~ongoing Phase 1/2 MARINA ~~clinical~~ trial, ~~of AOC 1001 in adults with DM1 under our Investigational New Drug application, or IND. In addition, in July 2021 the FDA granted Orphan Drug Designation for AOC 1001 for the treatment of DM1.~~

~~We continue to be on track to initiate the Phase 1/2 MARINA clinical~~a trial ~~this year. The primary objective of the trial is~~designed to evaluate the safety and tolerability of single and multiple ascending doses of AOC 1001 administered ~~intravenously.~~intravenously in adults with DM1. The Part A single dose cohort of MARINA ~~trial will assess~~is fully enrolled, and dosing is complete. In Part A, there were no serious adverse events observed and any adverse events were mild to moderate. We are continuing to enroll patients in the activity of AOC 1001 across key biomarkers, including spliceopathy, a key biomarker for DM1, and knockdown of DMPK mRNA, the disease-related mRNA responsible for DM1. Though the Phase 1/2 trial is not powered to assess functional benefit, it will explore the clinical activity of AOC 1001, including measures of mobility and muscle strength, as well as patient reported outcomes and quality of life measures.Part B multidose cohort. In the ~~second half~~fourth quarter of 2022, we plan to conduct ~~and announce~~ a preliminary assessment of safety, tolerability and key biomarkers in approximately half of the trial participants from the MARINA study. In July, we announced the initiation of the Phase 2 MARINA open-label extension study, ~~participants.~~or MARINA-OLE. The MARINA-OLE is a two-year study that will continue to evaluate the safety, tolerability, pharmacokinetics, pharmacodynamics, and efficacy of AOC 1001 in patients that previously enrolled in the Phase 1/2 MARINA trial. The U.S. Food and Drug Administration, or FDA, and European Medicines Agency, or EMA, have granted Orphan Designation for AOC 1001. The FDA has also granted Fast Track Designation to AOC 1001 for the treatment of DM1.

Our advancing and expanding pipeline also includes AOC 1044, the lead of three programs ~~in facioscapulohumeral muscular dystrophy, or FSHD,~~for the treatment of Duchenne Muscular Dystrophy, or DMD, ~~muscle atrophy~~ and ~~Pompe disease.~~AOC 1020, designed to treat facioscapulohumeral muscular dystrophy, or FSHD. We ~~recently nominated AOC 1044 as the clinical development candidate for our lead DMD program targeting Exon 44. We are planning to initiate clinical studies for~~anticipate that both AOC 1044 and ~~our~~ AOC ~~FSHD program in~~1020 will enter the clinic by the end of 2022 following additional preparatory preclinical studies and regulatory clearance. In addition to our muscle franchise, we ~~have research~~are also broadening the development of AOCs beyond muscle tissues through both internal discovery efforts and key partnerships that are focused on immune cells, cardiac tissue and other cell types.

Since our inception in 2012, we have devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing our proprietary AOC platform, identifying potential product candidates, establishing our intellectual property portfolio, ~~and~~ conducting research, preclinical and ~~preclinical~~clinical studies, and providing other

general and administrative support for these operations. We have not generated any revenue from product sales. In June 2020, we completed our initial public offering, or IPO, of 16,560,000 shares of our common stock at a price to the public of $18.00 per share, including the exercise in full by the underwriters of their option to purchase 2,160,000 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were $274.1 million, net of

underwriting discounts, commissions and offering costs. In August 2021, we completed a public offering of 9,200,000 shares of our common stock at a public offering price of $18.00 per share, for aggregate net proceeds of $155.1 million, after deducting underwriting discounts, commissions and offering costs. In July 2021, we entered into a sales agreement, or the Sales Agreement, with Cowen and Company, LLC, or the Sales Agent, under which we may, from time to time, sell shares of common stock having an aggregate offering price of up to $150.0 million through the Sales Agent. Through June 30, 2022, we have sold 5,046,860 shares of our common stock pursuant to the Sales Agreement and received net proceeds of $82.0 million, after deducting offering-related transaction costs and commissions. Since our inception through June 30, ~~2021,~~2022, other significant sources of capital raised to fund our operations were comprised of aggregate gross proceeds of $131.6 million from the sale and issuance of convertible preferred stock/units and convertible notes ~~$32.6~~and $37.0 million from funding under collaboration and research services ~~agreements, and $7.0 million from loans from Silicon Valley Bank, or SVB, under a Loan and Security Agreement, as amended, or the LSA.~~agreements. As of June 30, ~~2021,~~2022, we had cash, cash equivalents and marketable securities of ~~$279.5~~$398.2 million. On August 6, 2021, we completed a public offering of 9,200,000 shares of our common stock at a public offering price of $18.00 per share, for aggregate net proceeds of approximately $155.3 million, after deducting underwriting discounts, commissions and estimated offering costs.

We have incurred operating losses in each year since inception. Our net losses were ~~$44.4~~$118.0 million and ~~$24.7~~$44.4 million for the years ended December 31, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$50.2~~$79.9 million for the six months ended June 30, ~~2021.~~2022. As of June 30, ~~2021,~~2022, we had an accumulated deficit of ~~$116.7~~$264.5 million. We expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned preclinical studies and clinical trials, continue our research and development activities, utilize third parties to manufacture our product candidates and related raw materials, hire additional personnel and protect our intellectual property and incur additional costs associated with being a public company, including audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs.property. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies and clinical trials and our expenditures on other research and development activities, as well as the generation of any collaboration and services revenue.

Based upon our current operating plans, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least 12 months from the date of the filing of this Form 10-Q. While we may generate revenue under our current and/or future collaboration agreements, we do not expect to generate any revenues from product sales until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and may never occur. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through 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 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.

The COVID-19 outbreak in the United States has caused significant business disruption. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the continued spread of COVID-19 and the measures taken by the governmental authorities, and its impact on our preclinical studies and clinical trials, employees and vendors, all of which are uncertain and cannot be predicted, particularly as we advance our product candidates into and through clinical development. In ~~response~~December 2021, we transitioned to ~~the COVID-19 outbreak, we limited the number of on-site staff in our research laboratories as well as other personnel,~~a hybrid model with ~~the remainder of~~ our employees ~~continuing~~generally working both remotely and onsite, and we anticipate we will continue to ~~work remotely.~~use this model going forward. To date, we have not experienced material disruptions in our business operations. However, a prolonged outbreak could have a material adverse impact on our financial results and business operations, including the timing of and our ability to complete certain clinical trials and other efforts required to advance the development of our product candidates and raise additional capital.

In April 2019, we entered into a Research Collaboration and License Agreement, or the Lilly Agreement, with Eli Lilly and Company, or Lilly, for the discovery, development and commercialization of AOC products in immunology and other select indications on a worldwide basis. Under the Lilly Agreement, we and Lilly will collaborate on preclinical research and discovery activities for such products, with Lilly being responsible for funding the cost of such activities by both parties. Lilly will also lead the clinical development, regulatory approval and commercialization of all such products, at its sole cost. We granted Lilly an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under our technology to research,

develop, manufacture, and sell products containing AOCs that are directed to up to six mRNA targets. We retain the right to use our technology to perform our obligations under the agreement and for all purposes not granted to Lilly. Lilly paid us an upfront license fee of $20.0 million in 2019, and we are eligible to receive up to $60.0 million in development milestone payments, up to $140.0 million in regulatory milestone payments and up to $205.0 million in commercialization milestone payments per target. We are eligible to receive a tiered royalty ranging from the mid-single to low-double digits from Lilly on worldwide annual net sales of licensed products, subject to specified and capped reductions for the market entry of biosimilar products, loss of patent coverage of licensed products and for payments owed to third parties for additional rights necessary to commercialize licensed products in the territory.

Concurrently with the Lilly Agreement, we issued a convertible promissory note to Lilly, or the Lilly Note, and received cash proceeds of $15.0 million in 2019. The Lilly Note accrued simple interest of 8.0% per annum and, if not converted, would have matured in October 2020. In connection with the sale of our Series C convertible preferred stock in November 2019, all outstanding principal and interest accrued under the Lilly Note converted into 4,576,342 shares of our Series C convertible preferred stock, at a conversion price equal to 80% of the per share cash price paid by the investors in the Series C convertible preferred stock financing. In connection with our IPO in June 2020, the Series C convertible preferred stock related to the Lilly Note converted into 2,169,396 shares of our common stock.

Our revenue to date has been derived from payments received under the Lilly Agreement and other license and research agreements. For the foreseeable future, we may generate revenue from reimbursements of services under the Lilly Agreement, as well as a combination of upfront payments and milestone payments under our current and/or future collaboration agreements. We do not expect to generate any revenue from the sale of products unless and until such time that our product candidates have advanced through clinical development and regulatory approval, if ever. We expect that any revenue we generate, if at all, will fluctuate from quarter-to-quarter as a result of the timing and amount of payments relating to such services and milestones and the extent to which any of our products are approved and successfully commercialized. If we fail to complete preclinical and clinical development of product candidates or obtain regulatory approval for them, our ability to generate future revenues and our results of operations and financial position would be adversely affected.

Research and development expenses consist of external and internal costs associated with our research and development activities, including our discovery and research efforts, and the preclinical and clinical development of our product candidates. Our research and development expenses include:

Research and development costs, including costs reimbursed under the Lilly Agreement, are expensed as incurred, with reimbursements of such amounts being recognized as revenue. We account for nonrefundable advance payments for goods and services that will be used in future research and development activities as expenses when the service has been performed or when the goods have been received.

At any one time, we are working on multiple programs. Our internal resources, employees and infrastructure are not directly tied to any one research or drug discovery program and are typically deployed across multiple programs. As such, we do not track internal costs on a specific program basis. The following table summarizes our external costs and internal costs for the periods presented (in thousands):

We expect our research and development expenses to increase for the foreseeable future as we continue to conduct our ongoing research and development activities, advance our preclinical research programs toward clinical development, including conducting IND-enabling studies, and conduct clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates.

The timelines and costs associated with research and development activities are uncertain, can vary significantly for each product candidate and development program, and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to preclinical and clinical results, regulatory developments, ongoing assessments as to each program’s commercial potential, and our ability to maintain or enter into new collaborations, to the extent we determine the resources or expertise of a collaborator would be beneficial for a given program. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which development programs may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation, for employees in our executive, finance, accounting, legal, business development and support functions. Other general and administrative expenses include allocated facility, information technology and depreciation related costs not otherwise included in research and development expenses and professional fees for auditing, tax, intellectual property and legal services. Costs related to filing and pursuing patent applications are recognized as general and administrative expenses as incurred since recoverability of such expenditures is uncertain.

We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development ~~activities~~ and increased costs of operating as a public company. These increased costs will likely include increased expenses related to audit, legal, regulatory and tax services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with operating as a public company.other corporate activities.

Interest income consists primarily of interest earned on our cash, cash equivalents and marketable securities.

~~Interest expense consists of cash and noncash interest expense associated with our previously outstanding debt under the LSA.~~

Prior to our IPO, we classified our outstanding warrant to purchase shares of our Series A convertible preferred stock as a liability on our balance sheets at its estimated fair value since the underlying convertible preferred stock was classified as temporary equity. At the end of each reporting period, changes in the estimated fair value during the period were recorded as a component of other income (expense). In connection with our IPO, this warrant was adjusted to become a warrant to purchase shares of our common stock and met the criteria to be classified within stockholders’ equity; therefore, the warrant was no longer subject to liability accounting. Accordingly, the fair value of the warrant liability was reclassified to stockholders’ equity.

The following table summarizes our results of operations for the periods presented (in thousands):

Revenue was $2.2 million for the three months ended June 30, 2022 compared to $2.6 million for the three months ended June 30, ~~2021 compared to $1.5 million for the three months ended June 30, 2020.~~2021. Revenue during both periods was primarily derived from the Lilly Agreement. The ~~increase~~decrease was primarily due to ~~higher~~a decrease in direct reimbursable collaboration-related ~~research and development~~ expenses resulting in ~~the recognition of higher~~lower corresponding revenue under the Lilly Agreement.

Research and development expenses were $39.8 million for the three months ended June 30, 2022 compared to $22.7 million for the three months ended June 30, ~~2021 compared to $9.0 million for the three months ended June 30, 2020.~~2021. The increase was primarily driven by the advancement of AOC 1001, AOC 1044 and ~~our~~ AOC ~~FSHD program,~~1020, as well as internal and external costs related to the expansion of our overall research capabilities.

General and administrative expenses were $8.7 million for the three months ended June 30, 2022 compared to $6.3 million for the three months ended June 30, ~~2021 compared to $2.9 million for the three months ended June 30, 2020.~~2021. The increase was primarily due to higher personnel costs ~~(including noncash stock-based compensation),~~and professional fees ~~and insurance~~as well as facilities costs ~~related~~ to ~~being a public company.~~support our expanded operations.

Other income was $14,000 for the three months ended June 30, 2021 compared to other expense of $188,000 for the three months ended June 30, 2020. The change was primarily related to interest expense in 2020 associated with our previously outstanding debt under the LSA and expenses recorded in 2020 associated with the change in the estimated fair value of our previously outstanding preferred stock warrant.

The following table summarizes our results of operations for the periods presented (in thousands):

Revenue was $4.0 million for the six months ended June 30, 2022 compared to $5.3 million for the six months ended June 30, ~~2021 compared to $2.9 million for the six months ended June 30, 2020.~~2021. Revenue during both periods was primarily derived from the Lilly Agreement. The ~~increase~~decrease was primarily due to ~~higher~~a decrease in direct reimbursable collaboration-related ~~research and development~~ expenses resulting in ~~the recognition of higher~~lower corresponding revenue under the Lilly Agreement.

Research and development expenses were $67.5 million for the six months ended June 30, 2022 compared to $43.4 million for the six months ended June 30, ~~2021 compared to $14.5 million for the six months ended June 30, 2020.~~2021. The increase was primarily driven by the advancement of AOC 1001, AOC 1044 and ~~our~~ AOC ~~FSHD program,~~1020, as well as internal and external costs related to the expansion of our overall research capabilities.

General and administrative expenses were $17.3 million for the six months ended June 30, 2022 compared to $12.2 million for the six months ended June 30, ~~2021 compared to $4.9 million for the six months ended June 30, 2020.~~2021. The increase was primarily due to higher personnel costs ~~(including noncash stock-based compensation),~~and professional fees ~~and insurance~~as well as facilities costs ~~related~~ to ~~being a public company.~~

Other income was $27,000 for the six months ended June 30, 2021 compared to other expense of $123,000 for the six months ended June 30, 2020. The change was primarily related to interest expense in 2020 associated withsupport our previously outstanding debt under the LSA and expenses recorded in 2020 associated with the change in the estimated fair value of our previously outstanding preferred stock warrant, partially offset by lower interest income in 2021 due to lower interest rates.expanded operations.

In June 2020, we completed our IPO of 16,560,000 shares of our common stock at a price to the public of $18.00 per share, including the exercise in full by the underwriters of their option to purchase 2,160,000 additional shares of our common stock. Including the option exercise, our aggregate net proceeds from the offering were $274.1 million, net of underwriting discounts, commissions and offering costs. In August 2021, we completed a public offering of 9,200,000 shares of our common stock at a public offering price of $18.00 per share, for aggregate net proceeds of $155.1 million, after deducting underwriting discounts, commissions and offering costs.

In July 2021, we entered into the Sales Agreement with the Sales Agent, under which we may, from time to time, sell shares of common stock having an aggregate offering price of up to $150.0 million through the Sales Agent. Through June 30, 2022, we have sold 5,046,860 shares of our common stock pursuant to the Sales Agreement and received net proceeds of $82.0 million, after deducting offering-related transaction costs and commissions. From July 1, 2022 through August 9, 2022, we sold 1,042,300 shares of our common stock pursuant to the Sales Agreement and received net proceeds of $18.7 million, after deducting offering-related transaction costs and commissions. Since our inception through June 30, ~~2021,~~2022, other significant sources of capital raised to fund our operations were comprised of aggregate gross proceeds of $131.6 million from the sale and issuance of convertible preferred stock/units and convertible notes ~~$32.6~~and $37.0 million from funding under collaboration and research services ~~agreements, and $7.0 million from loans from SVB under the LSA.~~ agreements.

As of June 30, ~~2021,~~2022, we had cash, cash equivalents and marketable securities of ~~$279.5 million.~~

In July 2018 and February 2019, we issued convertible promissory notes to certain of our existing investors, or the 2018 Notes and 2019 Notes, respectively, and received proceeds of $3.0 million and $4.5 million, respectively. The 2018 Notes and 2019 Notes accrued simple interest at a rate of 8% and 10% per annum, respectively, and had a maturity date in December 2020, subject to earlier conversion.

~~In addition, in April 2019, as described above, in connection with the Lilly Agreement, we issued the Lilly Note and received cash proceeds of $15.0 million.~~

In November 2019, in connection with our Series C financing transaction, all outstanding amounts of principal and accrued interest from the 2018 Notes, 2019 Notes and Lilly Note, which totaled $23.8 million, were converted into an aggregate of 6,893,036 shares of our Series C convertible preferred stock, which subsequently converted into shares of our common stock in connection with our IPO.

In June 2017, we entered into an amendment to the LSA with SVB, or the First LSA Amendment, which provided up to $7.0 million in available borrowings in two tranches. In 2017, we drew the first tranche of $5.0 million, of which $4.6 million was used to repay our existing debt obligations to SVB. In August 2018, we drew the second tranche of $2.0 million. Interest accrued on the unpaid principal balance at an adjustable annual rate of the prime rate per the Wall Street Journal plus 0.20%. In addition to our monthly payments of principal and interest, our repayment obligations included a final payment of 6.5% of the original principal advanced, which was due upon final maturity of the loan in June 2021. On June 30, 2020, we voluntarily prepaid the outstanding principal balance of $2.8 million and final payments and accrued interest of $0.5 million under the LSA, and the LSA was terminated.

In connection with execution of the LSA, we issued SVB a warrant to purchase 16,474 shares of our Series A convertible preferred stock at an exercise price of $2.2615 per share, exercisable at any time following issuance with a term of ten years. In connection with the completion of our IPO in June 2020, the preferred stock warrant was adjusted to become a warrant exercisable for 7,809 shares of common stock at an exercise price of $4.77 per share. In connection with the First LSA Amendment in June 2017, we issued SVB an additional warrant to purchase 9,442 shares of common stock at an exercise price of $0.53 per share, exercisable at any time following issuance with a term of seven years. On June 17, 2020, the warrants were cashless exercised for an aggregate of 15,833 shares of common stock.

On July 2, 2021, we entered into a sales agreement, or the Sales Agreement, with Cowen and Company, LLC, or the Sales Agent, under which we may, from time to time, sell shares of common stock having an aggregate offering price of up to $150.0 million through the Sales Agent. Sales of our common stock made pursuant to the Sales Agreement, if any, will be made under our shelf registration statement on Form S-3, which became automatically effective upon filing on July 2, 2021, or the Shelf Registration Statement. We are not obligated to, and cannot provide any assurances that we will, make any sales of the shares under the Sales Agreement. In addition, the Sales Agreement may be terminated by the Sales Agent or us at any time upon ten days’ notice to the other party, or by the Sales Agent, with respect to itself, at any time in certain circumstances, including the occurrence of a material adverse change. To date, there have been no sales of common stock pursuant to the Sales Agreement.

On August 6, 2021, we completed a public offering of 9,200,000 shares of our common stock at a public offering price of $18.00 per share. The net proceeds from the offering were approximately $155.3 million, after deducting underwriting discounts, commissions and estimated offering costs.~~The shares sold in the offering were registered pursuant to our Shelf Registration Statement.~~

~~As of June 30, 2021, we had cash, cash equivalents and marketable securities of $279.5~~$398.2 million. Based upon our current operating plans, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least 12 months from the date of the filing of this Form 10-Q. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting preclinical studies and testing product candidates in clinical trials is costly, and the timing of progress and expenses in these studies and trials is uncertain.

Our future capital requirements are difficult to forecast and will depend on many factors, including but not limited to:

While we may generate revenue under our current and/or future collaboration agreements, we do not expect to generate any revenues from product sales until we successfully complete development and obtain regulatory approval for one or more of our product candidates, which we expect will take a number of years and may never occur. If we obtain regulatory approval for any of our product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including current and potential future 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. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Our failure to raise capital or enter into such other arrangements 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.

The following table summarizes our cash flows for the periods presented (in thousands):

Net cash used in operating activities was $65.1 million for the six months ended June 30, 2022, which consisted primarily of cash used to fund our operations related to the development of AOC 1001, AOC 1044 and AOC 1020. Net cash used in operating activities was $47.8 million for the six months ended June 30, 2021, which consisted primarily of cash used to fund our operations related to the development of AOC 1001, AOC 1044 and ~~our~~ AOC ~~FSHD program. Net~~1020. The change in cash used in operating activities is due to increased research and development as well as general and administrative expenses as described under Results of Operations section above.

Net cash used in investing activities was ~~$14.9~~$193.1 million for the six months ended June 30, ~~2020,~~2022, which consisted primarily of cash used to ~~fund our operations related to the development~~purchase marketable securities and property and equipment partially offset by proceeds from maturities of ~~AOC 1001 and our other programs.~~

marketable securities. Net cash provided by investing activities was $2.3 million for the six months ended June 30, 2021, which consisted primarily of proceeds from maturities of marketable securities, partially offset by cash used to purchase property and ~~equipment.~~ equipment.

Net cash ~~used in investing~~provided by financing activities was ~~$10,000~~$62.9 million for the six months ended June 30, ~~2020,~~2022, which consisted primarily of ~~cash used~~net proceeds from sales of our common stock made pursuant to ~~purchase property and equipment.~~

the Sales Agreement. Net cash provided by financing activities was $0.4 million for the six months ended June 30, 2021, which consisted primarily of proceeds from the issuance of common stock under the ESPP and ~~proceeds from the~~ exercise of stock options. Net cash provided by financing activities was $272.9 million for the six months ended June 30, 2020, which consisted primarily of net proceeds from our IPO and net proceeds from the issuance of Series C convertible preferred stock, partially offset by payments related to the LSA.

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates. As of June 30, ~~2021,~~2022, there have been no material changes to our critical accounting policies and estimates from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” included in our annual report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC on March ~~15, 2021.~~1, 2022.

As of June 30, ~~2021,~~2022, there have been no material changes outside the ordinary course of our business to the contractual obligations we reported in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commitments,” included in our annual report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC on March ~~15, 2021.~~1, 2022.

~~During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.~~

As an emerging growth company under the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards, and, therefore, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We also intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley.

~~Our cash, cash equivalents and marketable securities consist~~As of ~~cash held~~June 30, 2022, there have been no material changes in ~~readily available checking and money market accounts, as well as debt securities. We are exposed to~~our market risk ~~related to fluctuations~~from that described in ~~interest rates~~“Management’s Discussion and ~~market prices. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level~~Analysis of ~~United States interest rates. However, due to the short-term nature~~Financial Condition and Results of ~~the instruments~~Operations – Quantitative and Qualitative Disclosures About Market Risk,” included in our ~~portfolio, a sudden change in market interest rates would not be expected to have a material impact~~annual report on ~~our financial condition or results of operations.~~

~~Inflation generally affects us by increasing our cost of labor and research and development contract costs. We do not believe inflation has had a material effect~~Form 10-K for the year ended December 31, 2021 filed with the SEC on ~~our results of operations during the periods presented.~~March 1, 2022.

We are exposed to market risk related to changes in foreign currency exchange rates. We contract with vendors that are located outside the United States, and certain invoices are denominated in foreign currencies. We are subject to fluctuations in foreign currency rates in connection with these arrangements. To date, we have not experienced any material effects from foreign currency fluctuations.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic and current reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable and not absolute assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated, as of the end of the period covered by this quarterly report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of June 30, ~~2021,~~2022, our disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We are not currently subject to any material legal proceedings. From time to time, we may be involved in legal proceedings or subject to claims incident to the ordinary course of business. Regardless of the outcome, such proceedings or claims can have an adverse impact on us because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

There have been no material changes to the risk factors set forth in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the SEC on March ~~15, 2021.~~1, 2022.

On June 11, 2020, the SEC declared effective our registration statement on Form S-1 (File No. 333-238612), as amended, filed in connection with our IPO. Our IPO closed on June 16, 2020, and we issued and sold 16,560,000 shares of our common stock at a price to the public of $18.00 per share, which included the exercise in full of the underwriters’ option to purchase additional shares. We received gross proceeds from our IPO of $298.1 million, before deducting underwriting discounts, commissions and offering costs of $24.0 million. The managing underwriters of the offering were Cowen and Company, LLC, SVB Leerink LLC, Credit Suisse Securities (USA) LLC and Wells Fargo Securities, LLC. No offering costs were paid or are payable, directly or indirectly, to our directors or officers, to persons owning 10% or more of any class of our equity securities or to any of our affiliates.

As of June 30, ~~2021,~~2022, we have ~~not~~ used ~~any~~approximately $116.4 million of the proceeds from our ~~IPO.~~IPO for general corporate purposes, including the advancement of our development programs. There has been no material change in our planned use of such proceeds from that described in the prospectus for our IPO dated June 11, 2020. We have invested a portion of the remaining proceeds from our IPO in short- and intermediate-term, investment-grade, interest-bearing securities.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Delaware		46-1336960
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

~~10975 N. Torrey Pines Road,~~10578 Science Center Drive, Suite ~~150~~125 ~~La Jolla,~~San Diego, California		~~92037~~92121
(Address of principal executive offices)		(Zip Code)

Large accelerated filer	☐☒	Accelerated filer	☐
Non-accelerated filer	☒☐	Smaller reporting company	☐
		Emerging growth company	☒☐

PART I – FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements (unaudited)	3
	Condensed Balance Sheets (unaudited)	3
	Condensed Statements of Operations and Comprehensive Loss (unaudited)	4
	Condensed Statements of ~~Convertible Preferred Stock and~~ Stockholders' Equity ~~(Deficit)~~ (unaudited)	5
	Condensed Statements of Cash Flows (unaudited)	7
	Notes to Condensed Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2119
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3027
Item 4.	Controls and Procedures	3027

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	3128
Item 1A.	Risk Factors	3128
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3128
Item 3.	Defaults Upon Senior Securities	3128
Item 4.	Mine Safety Disclosures	3128
Item 5.	Other Information	3128
Item 6.	Exhibits	3229

SIGNATURES		3330

			Fair Value Measurements Using								Fair Value Measurements Using
As of June 30, 2021	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
As of June 30, 2022									Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities:
U.S. Treasury securities									$	247,249	$	247,249	$	0	$	0
U.S. Government agency securities										4,928		0		4,928		0
Negotiable certificates of deposit										3,798		0		3,798		0
Corporate debt securities	$	3,035	$	0	$	3,035	$	0		17,137		0		17,137		0
Total	$	3,035	$	0	$	3,035	$	0	$	273,112	$	247,249	$	25,863	$	0

			Fair Value Measurements Using								Fair Value Measurements Using
As of December 31, 2020	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents:
As of December 31, 2021									Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Marketable securities:
U.S. Treasury securities									$	65,372	$	65,372	$	0	$	0
Negotiable certificates of deposit	$	720	$	0	$	720	$	0		3,873		0		3,873		0
Marketable securities:
Corporate debt securities		6,679		0		6,679		0		15,850		0		15,850		0
Total	$	7,399	$	0	$	7,399	$	0	$	85,095	$	65,372	$	19,723	$	0

	June 30,				June 30,
	2021		2020		2022		2021
Common stock options issued and outstanding		5,766		2,862		8,636		5,766
Common stock subject to repurchase or forfeiture		30		120		10		30
ESPP shares pending issuance		2		3		4		2
Total		5,798		2,985		8,650		5,798

As of June 30, 2021	Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
As of June 30, 2022										Maturity (in years)	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
U.S. Treasury securities										1 or less	$	197,630	$	0	$	(1,395	)	$	196,235
U.S. Government agency securities										1 or less		5,000		0		(72	)		4,928
Negotiable certificates of deposit										1 or less		2,647		0		(34	)		2,613
Corporate debt securities										1 or less		12,839		0		(211	)		12,628
U.S. Treasury securities										1 - 2		52,114		0		(1,100	)		51,014
Negotiable certificates of deposit										1 - 2		1,224		0		(39	)		1,185
Corporate debt securities	1 or less	$	3,035	$	0	$	0	$	3,035	1 - 2		4,644		0		(135	)		4,509
Total		$	3,035	$	0	$	0	$	3,035		$	276,098	$	0	$	(2,986	)	$	273,112

Balance at December 31, 2020	$	15,840
Revenue recognized		(2,573	)
Balance at June 30, 2021	$	13,267

Balance at December 31, 2021	$	11,108
Revenue recognized		(1,875	)
Balance at June 30, 2022	$	9,233

	June 30, 2021			December 31, 2020		��	June 30, 2022			December 31, 2021
Laboratory equipment	$	3,882		$	2,928		$	5,566		$	4,775
Computers and software		70			58			116			116
Office furniture and equipment		44			44			2,575			1,398
Leasehold improvements		417			417			249			249
Property and equipment, gross		4,413			3,447			8,506			6,538
Less accumulated depreciation		(1,857	)		(1,979	)		(2,369	)		(1,733	)
Total property and equipment, net	$	2,556		$	1,468		$	6,137		$	4,805

ROU assets (included in other assets)	$	182

Lease liabilities, current portion (included in accounts payable and accrued liabilities)	$	50
Lease liabilities, net of current portion		914
Total lease liabilities	$	964

Year ending December 31,
2021 (remaining)	$	17
2022		135
2022 (remaining)				$	1,519
2023		208			3,113
2024		214			3,207
2025		220			3,303
2026		188			3,111
Total lease payments		982			14,253
Less imputed interest		(18	)		(2,432	)
Total operating lease liabilities		964			11,821
Less lease liabilities, current portion		(50	)		(3,068	)
Lease liabilities, net of current portion	$	914		$	8,753

	Number of Options			Weighted- Average Exercise Price Per Share
Outstanding at December 31, 2020		3,788		$	9.06
Granted		2,154			23.61
Exercised		(82	)		1.49
Forfeited		(94	)		18.27
Outstanding at June 30, 2021		5,766		$	14.45

	Number of Options			Weighted- Average Exercise Price Per Share
Outstanding at December 31, 2021		5,778		$	14.49
Granted		3,028			14.95
Exercised		(12	)		1.19
Forfeited/expired		(158	)		22.02
Outstanding at June 30, 2022		8,636		$	14.53

	Six Months Ended June 30,		Six Months Ended June 30,
Stock Option Grants	2021	2020	2022	2021
Risk-free interest rate	0.5% - 1.2%	0.4%	1.5%-3.4%	0.5% - 1.2%
Expected volatility	87% - 88%	91% - 92%	85%	87%-88%
Expected term (in years)	5.5 - 6.1	5.4 - 6.1	5.5-6.1	5.5 - 6.1
Expected dividend yield	0%	0%	0%	0%

	Six Months Ended June 30,		Six Months Ended June 30,
ESPP	2021	2020	2022	2021
Risk-free interest rate	0.1%	0.2%	2.2%	0.1%
Expected volatility	75%	96%	79%	75%
Expected term (in years)	0.5	0.5	0.5	0.5
Expected dividend yield	0%	0%	0%	0%

	Three Months Ended June 30,					Increase		Three Months Ended June 30,				Increase
	2021		2020			(decrease)		2022		2021		(decrease)
Revenue	$	2,607	$	1,541		$	1,066	$	2,178	$	2,607	$	(429	)
Research and development expenses		22,706		8,984			13,722		39,789		22,706		17,083
General and administrative expenses		6,268		2,925			3,343		8,688		6,268		2,420
Other income (expense)		14		(188	)		202
Other income									609		14		595

Exhibit Number	Exhibit Description	Incorporated by Reference			Filed Herewith
		Form	Date	Number
3.1	Amended and Restated Certificate of Incorporation	8-K	6/16/2020	3.1
3.2	Amended and Restated Bylaws	8-K	6/16/2020	3.2
4.1	Form of Common Stock Certificate	S-1	5/22/2020	4.1
4.2	Amended and Restated Registration Rights Agreement, dated November 8, 2019, by and among Avidity Biosciences, Inc. and certain of its stockholders	S-1	5/22/2020	4.2
10.1	Sales Agreement, dated July 2, 2021, between Avidity Biosciences, Inc. and Cowen and Company, LLC	8-K	7/2/2021	1.1
31.1	Certification of Chief Executive Officer of Avidity Biosciences, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Chief Financial Officer of Avidity Biosciences, Inc., as required by Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				X
101.INS	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.				X
101.SCH	Inline XBRL Taxonomy Extension Schema Document				X
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101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document				X
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101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document				X
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)				X

	Avidity Biosciences, Inc.

Date: August 9, ~~2021~~2022	By:	/s/ Sarah Boyce
		Sarah Boyce
		President, Chief Executive Officer and Director (Principal Executive Officer)

Date: August 9, ~~2021~~2022	By:	/s/ Michael F. MacLean
		Michael F. MacLean
		Chief Financial and Chief Business Officer (Principal Financial and Accounting Officer)