SEC Filing | Design Therapeutics, Inc

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dsgn-10q_20210331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-40288

Design Therapeutics, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware		82-3929248
( State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6005 Hidden Valley Road, Suite 110 Carlsbad, California		92011
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (858) 293-4900

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

DSGN

The Nasdaq Global Select Market

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

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

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

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

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

The number of outstanding shares of the registrant’s common stock, $0.0001 par value per share, as of April 30, 2021, was 55,617,322.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•

our plans to research, develop and commercialize our product candidates;

•

the initiation, progress, success, cost and timing of our preclinical studies, clinical trials and product development activities;

•

the therapeutic potential of our product candidates, and the disease indications for which we intend to develop our product candidates;

•

our ability and timing to advance our product candidates into, and to successfully initiate, conduct, enroll and complete, clinical trials;

•

our ability to manufacture our product candidates for clinical development and, if approved, for commercialization, and the timing and costs of such manufacture;

•

the performance of third parties in connection with the development and manufacture of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers;

•

our ability to obtain funding for our operations, including funding necessary to initiate and complete clinical trials of our product candidates;

•

the size and growth of the potential markets for our product candidates and our ability to serve those markets;

•

the potential scope, duration and value of our intellectual property rights;

•

our ability, and the ability of our licensors, to obtain, maintain, defend and enforce intellectual property rights protecting our platform technologies and product candidates, and our ability to develop and commercialize our product candidates without infringing the proprietary rights of third parties;

•

our ability to recruit and retain key personnel;

•

the effects of the COVID-19 pandemic on our operations; and

•

other risks and uncertainties, including those described under Part II, Item 1A, “Risk Factors” of this Quarterly Report.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A, “Risk Factors” of this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Unless the context otherwise indicates, references in this Quarterly Report to the terms “Design”, “the Company”, “we,” “our, and “us” refer to Design Therapeutics, Inc., and references to our “common stock” refers to our voting common stock.

SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS

An investment in shares of our common stock involves a high degree of risk. Below is a list of the more significant risks associated with our business. This summary does not address all of the risks that we face. Additional discussion of the risks listed in this summary, as well as other risks that we face, are set forth under Part II, Item 1A, “Risk Factors” in this Quarterly Report. Some of the material risks associated with our business include the following:

•

We have a limited operating history, have incurred net losses since our inception, and anticipate that we will continue to incur significant losses for the foreseeable future. We may never generate any revenue or become profitable or, if we achieve profitability, may not be able to sustain it.

•

We are early in our development efforts and all of our research programs are still in the preclinical or discovery stage. We have no history of conducting clinical trials to test our product candidates in humans.

•

Preclinical and clinical development involves a lengthy and expensive process with uncertain timelines and outcomes, and results of earlier studies and trials may not be predictive of future trial results. If development of our development programs is unsuccessful or delayed, we may be unable to obtain required regulatory approvals and be unable to commercialize our product candidates on a timely basis, if at all.

•

Our product candidates are based on novel technologies, which make it difficult to predict the timing, results and cost of product candidate development and likelihood of obtaining regulatory approval.

•

Our product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, cause us to suspend or discontinue planned clinical trials, limit the commercial profile of an approved label, or result in significant negative consequences following marketing approval, if any.

•

The regulatory approval process is lengthy, expensive and uncertain, and we may be unable to obtain regulatory approval for our product candidates under applicable regulatory requirements. The denial or delay of any such approval would delay commercialization of our product candidates and adversely impact our ability to generate revenue, our business and our results of operations.

•

The COVID-19 pandemic could adversely impact our business and affect our operations, as well as the business or operations of our manufacturers or other third parties with whom we conduct business.

•

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

•

We may rely on third parties to conduct, supervise, and monitor our planned clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

•

We contract with third parties for the manufacturing and supply of our product candidates for use in preclinical testing and planned clinical trials, which supply may become limited or interrupted or may not be of satisfactory quality and quantity.

•

Any approved products may fail to achieve the degree of market acceptance by physicians, patients, hospitals, healthcare payors and others in the medical community necessary for commercial success.

•

If the market opportunities for any of our product candidates are smaller than we believe they are, our revenue may be adversely affected, and our business may suffer.

•

If any of our product candidates are approved for marketing and commercialization and we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates, we will be unable to successfully commercialize our product candidates if and when they are approved.

•

We may not realize the benefits of any acquisitions, in-license or strategic alliances that we enter into.

•

We may wish to form collaborations in the future with respect to our product candidates, but may not be able to do so or to realize the potential benefits of such transactions, which may cause us to alter or delay our development and commercialization plans.

•

We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

•

Our business operations and current and future relationships with investigators, health care professionals, consultants, third-party payors and customers are subject, directly or indirectly, to federal and state healthcare fraud and abuse laws,

transparency laws and other healthcare laws and regulations. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

•

If we are unable to obtain and maintain sufficient intellectual property protection for our platform technologies and product candidates, or if the scope of the intellectual property protection is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize our products may be adversely affected.

•

We may not be able to protect our intellectual property rights throughout the world.

•

We may rely on trade secret and proprietary know-how which can be difficult to trace and enforce and, if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

•

The price of our common stock could be subject to volatility related or unrelated to our operations.

iii

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Balance Sheets	1
	Statements of Operations	2
	Statements of Comprehensive Loss	3
	Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)	4
	Statements of Cash Flows	5
	Notes to Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Mine Safety Disclosures	69
Item 5.	Other Information	69
Item 6.	Exhibits	70
Signatures		71

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

DESIGN THERAPEUTICS, INC.

BALANCE SHEETS

(in thousands, except share and par value data)

	March 31,			December 31,
	2021			2020
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	400,693		$	2,379
Investment securities		10,646			33,712
Prepaid expense and other current assets (including related party amounts of $60 and $0, respectively)		415			142
Total current assets		411,754			36,233
Property and equipment, net		100			71
Deferred offering costs		—			212
Total assets	$	411,854		$	36,516
Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable (including related party amounts of $20 and $20, respectively)	$	2,033		$	1,399
Accrued expenses		1,673			931
Total current liabilities		3,706			2,330
Other long-term liabilities		142			145
Total liabilities		3,848			2,475
Commitments and contingencies (See Note 8)
Convertible preferred stock, $0.0001 par value; no shares and 22,500,000 shares authorized, no shares and 22,012,499 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively; liquidation preference of zero and $45,625 as of March 31, 2021 and December 31, 2020, respectively		—			45,356
Stockholders’ equity (deficit):
Common stock, par value $0.0001; 200,000,000 and 60,000,000 shares authorized, 55,617,322 and 16,604,774 shares issued, 55,042,550 and 15,957,821 shares outstanding at March 31, 2021 and December 31, 2020, respectively		6			1
Additional paid-in capital		425,435			451
Accumulated deficit		(17,437	)		(11,923	)
Accumulated other comprehensive income		2			156
Total stockholders’ equity (deficit)		408,006			(11,315	)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	411,854		$	36,516

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

DESIGN THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Revenue:
Grant revenue	$	—		$	142
Operating expenses:
Research and development (including related party amounts of $45 and $8, respectively)		3,875			377
General and administrative (including related party amounts of $60 and $112, respectively)		1,805			388
Total operating expenses		5,680			765
Loss from operations		(5,680	)		(623	)
Other income (expense), net (including related party expense amounts of $0 and $30, respectively)		166			(40	)
Net loss	$	(5,514	)	$	(663	)

Net loss per share, basic and diluted	$	(0.31	)	$	(0.04	)
Weighted-average shares of common stock outstanding, basic and diluted		17,630,178			15,667,115

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

DESIGN THERAPEUTICS, INC.

STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Net loss	$	(5,514	)	$	(663	)
Other comprehensive gain (loss):
Unrealized (loss) gain on available-for-sale securities		(154	)		181
Comprehensive loss	$	(5,668	)	$	(482	)

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

DESIGN THERAPEUTICS, INC.

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share data)

(Unaudited)


													Accumulated						Total
	Convertible										Additional		Other						Stockholders’
	Preferred Stock						Common Stock				Paid-in		Comprehensive			Accumulated			Equity
	Shares			Amount			Shares		Amount		Capital		Income			Deficit			(Deficit)
Balance at December 31, 2020		22,012,499		$	45,356			15,957,821	$	1	$	451	$	156		$	(11,923	)	$	(11,315	)
Issuance of Series B convertible preferred stock, net of $288 of issuance costs		19,083,979			124,712			—		—		—		—			—			—
Preferred stock converted into shares of common stock		(41,096,478	)		(170,068	)		25,212,548		4		170,064		—			—			170,068
Initial public offering of common shares, net of $21,728 of issuance costs		—			—			13,800,000		1		254,270		—			—			254,271
Vesting of restricted common stock		—			—			72,181		—		3		—			—			3
Stock-based compensation		—			—			—		—		647		—			—			647
Unrealized loss on investments		—			—			—		—		—		(154	)		—			(154	)
Net loss		—			—			—		—		—		—			(5,514	)		(5,514	)
Balance at March 31, 2021		—		$	—			55,042,550	$	6	$	425,435	$	2		$	(17,437	)	$	408,006


											Accumulated
	Convertible								Additional		Other					Total
	Preferred Stock				Common Stock				Paid-in		Comprehensive		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Income		Deficit			Deficit
Balance at December 31, 2019		—	$	—		15,640,133	$	1	$	—	$	—	$	(3,643	)	$	(3,642	)
Issuance of Series A convertible preferred stock, net of $270 of issuance costs		21,710,814		44,731		—		—		—		—		—			—
Conversion of convertible debt and interest to Series A convertible preferred stock		301,685		500		—		—		—		—		—			—
Settlement of bifurcated conversion liability		—		125		—		—		—		—		—			—
Vesting of restricted common stock		—		—		50,452		—		—		—		—			—
Stock-based compensation		—		—		—		—		4		—		—			4
Unrealized gain on investments		—		—		—		—		—		181		—			181
Net loss		—		—		—		—		—		—		(663	)		(663	)
Balance at March 31, 2020		22,012,499	$	45,356		15,690,585	$	1	$	4	$	181	$	(4,306	)	$	(4,120	)

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

DESIGN THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2021			2020
Cash flows from operating activities
Net loss	$	(5,514	)	$	(663	)
Reconciliation of net loss to net cash used in operating activities:
Depreciation		4			—
Stock-based compensation		647			4
Amortization of premiums on investment securities, net		(150	)		2
Non-cash interest expense		—			12
Non-cash interest expense—related party		—			26
Change in operating assets and liabilities:
Prepaid expense and other assets		—			(6	)
Prepaid expense and other assets—related party		(60	)		—
Deferred revenue		—			(142	)
Accounts payable and accrued liabilities		1,376			(354	)
Accounts payable and accrued liabilities—related party		—			(1,838	)
Other long-term liabilities		—			300
Net cash used in operating activities		(3,697	)		(2,659	)
Cash flows from investing activities
Purchases of investment securities		(5,111	)		(39,247	)
Proceeds from maturities of investment securities		28,172			—
Purchases of property and equipment		(33	)		—
Net cash provided by (used in) investing activities		23,028			(39,247	)
Cash flows from financing activities
Proceeds from initial public offering, net of issuance costs		254,271			—
Proceeds from issuance of convertible preferred stock, net of issuance costs		124,712			44,731
Proceeds from the issuance of notes payable, net of issuance costs—related party		—			200
Repayment of notes payable—related party		—			(400	)
Net cash provided by financing activities		378,983			44,531
Net increase in cash and cash equivalents		398,314			2,625
Cash and cash equivalents at beginning of period		2,379			77
Cash and cash equivalents at end of period	$	400,693		$	2,702
Supplemental disclosures
Conversion of convertible notes to convertible preferred shares, including bifurcated conversion liability	$	—		$	271
Conversion of convertible notes to convertible preferred shares, including bifurcated conversion liability - related party	$	—		$	354
Interest paid	$	—		$	18

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

DESIGN THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Organization

Design Therapeutics, Inc. (the “Company”) was incorporated in Delaware in December 2017 and is based in Carlsbad, California. The Company is a biopharmaceutical company pioneering a novel class of disease-modifying small-molecule therapeutics, called gene targeted chimeras (“GeneTACs”), that are designed to target the underlying cause of inherited nucleotide repeat expansion diseases. The Company’s lead product candidate is in Friedreich ataxia (“FA”), its second GeneTAC™ program is in myotonic dystrophy type-1 (“DM1”), and it is also advancing its GeneTAC portfolio to address other serious nucleotide repeat-driven monogenic diseases.

The Company has experienced net losses and negative cash flows from operating activities since inception and expects to incur net losses for the foreseeable future as it advances its research and development programs, conducts clinical trials for any future product candidates and commercializes any such product candidates for which it receives regulatory approval. As the Company continues to incur losses, its transition to profitability will depend on the successful development, approval and commercialization of its future product candidates, and on the achievement of sufficient revenue to support its cost structure. The Company may never achieve profitability, and unless and until it does, it will need to continue to raise additional capital to fund its operations.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include all adjustments, consisting of only normal recurring accruals, which in the opinion of management are necessary to present fairly the Company’s financial position as of the reporting date and results of operations for the periods presented. The preparation of the Company’s financial statements requires it to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Company’s financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to the recognition of grant revenue, accruals for research and development expenses and the valuation of equity-based awards. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates.

The full extent to which the novel coronavirus-2019 (“COVID-19”) pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, including research and development costs, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international markets. The Company has considered potential impacts arising from the COVID-19 pandemic and is not presently aware of any events or circumstances that would require the Company to update its estimates, judgments or revise the carrying value of its assets or liabilities.

Stock Splits

In February 2020, the Company effected a 5-for-1 forward stock split of its issued and outstanding common stock. Further, in March 2021, the Company effected a 1-for-1.63 reverse stock split of its issued and outstanding common stock. The par value and the authorized shares of the common stock were not adjusted as a result of these stock splits. The reverse stock split in March 2021 resulted in an adjustment to the convertible preferred stock conversion prices to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to the financial statements give retroactive effect to the stock splits for all periods presented.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities at the date of acquisition of three months or less to be cash equivalents. These investments may include money market accounts, money market funds, U.S. Government agency securities, corporate debt securities and commercial paper. The Company’s cash reserves are in a readily available checking account.

DESIGN THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

Investment Securities

Investments in securities with maturities at the date of acquisition of more than three months are considered marketable securities. The Company determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. The Company has classified its investment holdings as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. Further, the Company classifies its available-for-sale investment securities, including those with maturities beyond one year, as current assets on its balance sheets based on the highly liquid nature of the securities and because these investments are considered available for use in current operations. The Company’s investment policy sets minimum credit quality criteria and maximum maturity limits on its investments to provide for safety of principle, liquidity and a reasonable rate of return. Available-for-sale securities are recorded at fair value, based on current market valuations. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. Allowances for credit losses are reported on the balance sheet, if any.

The cost of available-for-sale investment securities is adjusted for amortization of premiums and accretion of discounts until the securities mature. Such amortization and accretion is included in other income (expense) on the statements of operations. Realized gains and losses, if any, are also included in other income (expense) on the statement of operations and are derived using the specific identification method for determining the cost of the securities sold. During the periods presented, no realized gains or losses were recorded on the sale of investment securities and no impairments to reduce the value of any security was taken. See Note 5 for further discussion.

Revenue Recognition

The Company has generated revenue from grants awarded to it by the National Science Foundation (“NSF”), the National Institutes of Health (“NIH”) and the Friedreich’s Ataxia Research Alliance (“FARA”). These grants provide the Company with funding for certain research and development activities on a best-efforts basis and do not require scientific achievement as a performance obligation. The Company has determined that the entities funding these grant awards do not meet the definition of a “customer”, as defined by Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), and does not consider there to be a transfer of control of goods or services to the entities funding the grant. As such, the Company recognizes revenue from these awards in the period during which the related qualifying services are rendered and costs are incurred in accordance ASC 730, Research and Development. ASC 730 requires an assessment, at the inception of the grant, to determine whether the agreement is a liability or a contract to perform research and development services for others. Further, these grants are subject to the contribution’s guidance under ASC 958, Not-for-Profit Entities-Revenue Recognition, and as such, the Company determines whether it is obligated to repay the funds received to the grantor regardless of the outcome of the related research and development activities. If it determines there is such a liability, it estimates the obligation and recognize that liability. Alternatively, if the Company is not required to repay the funds, the grant agreement is accounted for as a contract to perform research and development services for others, in which case, the grant revenue is recorded as income in the statements of operations as the expenses are incurred.

The Company’s current grant revenue is not deemed refundable, and therefore, no liability is recognized when income is recorded. Grant funding received prior to expenses being incurred are recorded as deferred revenue on the Company’s balance sheets. See Note 7 for further discussion.

Research and Development Expenses

Research and development expenses consist primarily of direct and indirect costs incurred in connection with its discovery efforts, and the preclinical and formulation development of its product candidates. In the future, the Company expects a substantial portion of its research and development expenses will relate to the clinical development of its product candidates. Direct costs include contracted research development and manufacturing, consulting fees, license fees, laboratory supplies and other expenses incurred to sustain research and development programs. Indirect costs include personnel-related expenses, consisting of employee salaries, related benefits, and stock-based compensation expense for employees engaged in research and development activities, facilities related expenses, and other indirect expenses. A significant portion of the Company’s research and development expenses have been direct costs, which the Company tracks by stage of development, preclinical or clinical. However, the Company does not track its internal research and development expenses on a program specific basis, unless specific to research grants, because these costs are deployed across multiple projects and, as such, are not separately classified. Research and development expenses are charged to operating expenses as incurred when these expenditures relate to the Company’s research and development efforts and have no alternative future uses.

DESIGN THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

The Company has entered into various contracts with research and development organizations, vendors and consultants. Payments for these activities are based on the terms of the individual agreements, which may differ from the of periods over which materials or services are provided. Payments made in advance of performance are reflected in the accompanying balance sheets as prepaid expenses. The Company records accruals for estimated costs incurred for ongoing research and development activities. The Company determines accrual estimates through review of the underlying contracts along with discussions with research and other key personnel as to the progress of the research and development activities, invoices received and contracted costs. During the course of a study or trial, the Company adjusts its rate of expense recognition if actual results differ from its estimates. Significant judgments and estimates may be made in determining the prepaid or accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates.

Stock-Based Compensation

Stock options issued pursuant to the Company’s 2021 Equity Incentive Plan (the “2021 Plan”) and 2018 Equity Incentive Plan (the “2018 Plan”) and option features associated with the rights to purchase shares pursuant to the Company’s 2021 Employee Stock Purchase Plan (the “ESPP”) are valued using the Black-Scholes option pricing model on the date of grant or subscription period. This option pricing model involves a number of estimates, including the expected lives of the stock options or subscription period, the Company’s anticipated stock volatility and interest rates. The Company recognizes the expense for equity awards on a straight-line basis over the requisite service periods of the awards or the number of shares estimated to be issued pursuant to the ESPP. Forfeitures are recognized as they occur.

Stock-based compensation expense recognized in the Company’s statements of operations during the three months ended March 31, 2021 and 2020, were as follows (in thousands):

	Three Months ended March 31,
	2021		2020
Research and development	$	164	$	3
General and administrative		483		1
Total	$	647	$	4

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity. The guidance, among other items, clarifies that certain transactions between collaborative participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. The ASU’s amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted for periods beginning after December 15, 2020. The Company has not yet adopted this guidance and does not currently expect the adoption will have a material impact on its financial statements and related disclosures.

3. Net Loss Per Share

Basic net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding for the period determined using the treasury-stock and if-converted methods. Dilutive common stock equivalents are comprised of convertible preferred stock, restricted common stock subject to repurchase, stock options outstanding under the Company’s equity incentive plans, employee stock purchase rights under the Company’s ESPP, and shares of common stock that are issuable under convertible debt, as applicable.

For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding as inclusion of the potentially dilutive securities would be antidilutive. More specifically, as of March 31, 2021 and 2020, convertible preferred stock, stock options, employee stock purchase rights, and unvested common stock subject to repurchase, as applicable, totaling approximately 2,604,000 shares and 14,511,000 shares, respectively, were excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive.

DESIGN THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

4. Fair Value Measurements

Accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or non-recurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:Observable inputs such as quoted prices in active markets.

Level 2:Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3:

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The carrying value of the Company’s cash, accounts payable and accrued liabilities are considered to be representative of their respective fair values due to the short-term nature of those instruments. The Company’s investment securities, which may include money market accounts, money market funds, certificates of deposits, U.S. Treasury securities, and high quality, marketable debt instruments of corporations and government sponsored enterprises, are measured at fair value in accordance with the fair value hierarchy. None of the Company’s non-financial assets or liabilities are recorded at fair value on a non-recurring basis and no transfers between levels have occurred during the periods presented.

The following table summarize the Company’s financial instruments measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020 (in thousands):

	Fair Value Measurement at End of Period Using:
			Quoted Prices
			In Active
			Markets		Significant
			For		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
As of March 31, 2021:
Assets:
Money market funds⁽¹⁾	$	393,499	$	393,499	$	—	$	—
Certificates of deposit		750		750		—		—
U.S. Treasury securities		9,896		9,896		—		—
Total	$	404,145	$	404,145	$	—	$	—
As of December 31, 2020:
Assets:
Money market funds⁽¹⁾	$	2,100	$	2,100	$	—	$	—
Certificates of deposit		1,754		1,754		—		—
U.S. Treasury securities		31,958		31,958		—		—
Total	$	35,812	$	35,812	$	—	$	—

⁽¹⁾

Included in cash and cash equivalents on the accompanying balance sheets.

Interest bearing money market accounts and certificates of deposit are valued at amortized cost, which approximates fair value.

DESIGN THERAPEUTICS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS—(Continued)

5. Investment Securities

The Company’s investment policy defines allowable investment securities and establishes guidelines relating to credit quality, diversification, and maturities of its investments to preserve principal and maintain liquidity. In accordance with the Company’s investment policy, it has invested funds in marketable securities. The cost, gross unrealized holding gains, gross unrealized holding losses, allowances for credit losses and fair value of available-for-sale investments by types, maturies and classes of securities at March 31, 2021 and December 31, 2020 consisted of the following (in thousands):

		March 31, 2021
											Estimated
									Allowance		Fair
		Amortized		Unrealized		Unrealized			for Credit		Market
	Maturity	Cost		Gains		Losses			Losses		Value
Certificates of deposits	Within 1 year	$	750	$	—	$	—		$	—	$	750
U.S. Treasury securities	Within 1 year		4,787		3		—			—		4,790
U.S. Treasury securities	1 year to 2 years		5,107		—		(1	)		—		5,106
Total		$	10,644	$	3	$	(1	)	$	—	$	10,646

December 31, 2020

Estimated

Allowance

Fair

Amortized

Unrealized

for Credit

Market

Maturity

Cost

Gains

Losses

Value

Certificates of deposits

Within 1 year

1,750