Tectonic Therapeutic Inc

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Business

Tectonic Therapeutic, Inc. (formerly AVROBIO, Inc.) (the “Company” or “Tectonic”) is a clinical-stage biotechnology company focused on the discovery and development of therapeutic proteins and antibodies that modulate the activity of

G-protein

coupled receptors (“GPCRs”). The Company focuses on areas of significant unmet medical need, often where therapeutic options are poor or nonexistent, as these are areas where new medicines have the potential to improve patient quality of life. The Company’s corporate headquarters are in Watertown, Massachusetts.

Reverse Merger and

Pre-Merger

Financing Transaction

On June 20, 2024, the Company completed its previously announced merger transaction in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of January 30, 2024 (the “Merger Agreement”) with AVROBIO, Inc. (“AVROBIO”), pursuant to which Alpine Merger Subsidiary, Inc., a wholly owned subsidiary of AVROBIO, merged with and into the entity formerly known as Tectonic Therapeutic, Inc., now known as Tectonic Operating Company, Inc. (“Legacy Tectonic”), with Legacy Tectonic continuing as a wholly owned subsidiary of the surviving corporation of AVROBIO (the “Merger”). The Merger is being accounted for as a reverse recapitalization in accordance with generally accepted accounting principles in the United States of America (“GAAP”), with AVROBIO treated as the acquired company for financial reporting purposes, and Legacy Tectonic treated as the accounting acquirer.

Upon the closing of the Merger, each outstanding share of

Legacy Tectonic’s

common stock, including outstanding and unvested restricted stock, was converted into the right to receive a number of shares of AVROBIO’s common stock based on an exchange ratio of 0.53 (the “Exchange Ratio”),

as defined in the Merger Agreement, after giving effect to the 1-for-12 reverse stock split of AVROBIO common stock that was effected on June 20, 2024. The exchange ratio was retroactively applied to all outstanding common shares, convertible preferred shares, stock options and restricted stock.

Each outstanding and unexercised option to purchase shares of Legacy Tectonic’s common stock immediately prior to closing was assumed by AVROBIO and was converted into an option to purchase shares of AVROBIO common stock, with necessary adjustments to the number of shares and exercise price to reflect the Exchange Ratio. All of Legacy Tectonic’s restricted common stock outstanding and unvested immediately prior to the closing that was assumed by AVROBIO in the Merger remains unvested to the same extent and is subject to the same repurchase option, risk of forfeiture or other condition under any applicable restricted stock purchase agreement.

Legacy Tectonic stockholders received approximately

10,956,614

shares of AVROBIO common stock in connection with the Merger, including

6,901

shares of AVROBIO common stock subject to vesting terms, based on the number of shares of Legacy Tectonic common stock outstanding immediately prior to the Merger, including restricted stock, the number of shares of common stock issued to investors participating in the Subscription Agreements (as defined below) and SAFEs, and Legacy Tectonic convertible preferred stock outstanding immediately prior to the Merger, which was converted into shares of Legacy Tectonic common stock on

a one-for-one basis

immediately prior to the closing of the Merger.

In connection with the Merger, the Company and its designated rights agent entered into a contingent value rights agreement (the “CVR Agreement”). Pursuant to the CVR Agreement, each holder of AVROBIO common stock immediately prior to the closing received a contractual contingent value right (“CVR”) subject to and in accordance with the terms and conditions of the CVR Agreement, representing the contractual right to receive a pro rata portion of any net proceeds, if any, as a resulting from a disposition of certain AVROBIO intellectual property (including a license of AVROBIO’s pre-closing assets as defined in the CVR Agreement) after the closing and prior to the

18-month anniversary

of the

c

losing, received within

a 10-year period

following the

c

losing; provided thatno contingent payment will be payable to any holder of the CVRs until such time as the then-outstanding and undistributed proceeds exceeds $0.4 million in the aggregate. As of June 30, 2024, no

proceeds have been received under the CVR Agreement. As of June 30, 2024 there isno liability recorded in connection with the CVR Agreement.

Concurrently with the closing of the Merger, certain investors of

completed the purchase of 7,790,889 shares of

common stock pursuant to that certain

Subscription Agreement

dated January 30, 2024 (the “Subscription Agreement”) at a purchase price of approximately $12.40 per share for an aggregate purchase price of approximately $96.6 million. Shares of

common stock issued pursuant to the Subscription Agreements were converted into 4,163,606 shares of AVROBIO common stock at the closing of the Merger based on the Exchange Ratio, pursuant to the Merger Agreement.

Risks and Uncertainties

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations and the need to obtain additional financing. Product candidates currently under development will require significant additional research and development efforts, including extensive

pre-clinical

and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance reporting capabilities.

The Company’s proprietary GEODe

™

platform is currently in development. There can be no assurance that current and future research and development activities will be successfully completed, that adequate protection for owned intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.

Liquidity and Going Concern

As of June 30, 2024, the Company had an accumulated deficit of $118.5 million and has incurred losses and negative cash flows from operations since inception, including a net loss of $12.7 million and $27.9 million for the three and six months ended June 30, 2024, respectively. To date, the Company has financed its operations primarily through the issuance of common stock, convertible preferred stock, convertible promissory notes and Simple Agreements for Future Equity (“SAFEs”). The Company has devoted substantially all of its financial resources and efforts to business planning, conducting research and development, recruiting management and technical staff, and raising capital. Management expects that the Company’s operating losses and negative cash flows will continue for the foreseeable future as it continues to develop its product candidates.

As the Company continues to develop its proprietary platform and potential product candidates, it will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. It may never achieve profitability, and unless and until it does, it will continue to need to raise additional capital to fund its operations. Management believes that its current cash on hand, which includes the proceeds related to the Merger and Subscription Agreements, is sufficient to fund the Company’s planned operations for at least one year from the date of issuance of these unaudited condensed consolidated financial statements.

During the six months ended June 30, 2024, there were no significant changes to the Company’s significant accounting policies as described in the Company’s audited consolidated financial statements as of and for the years ended December 31, 2023 and 2022.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in conformity with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”). Any reference in these notes to applicable guidance is meant to refer to GAAP, as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of its financial position and its results of operations, changes in convertible preferred stock and stockholders’ equity (deficit) and cash flows. The information as of December 31, 2023 included in the unaudited interim condensed consolidated balance sheets was derived from audited annual consolidated financial statements but does not contain all of the footnote disclosures from the audited annual consolidated financial statements.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements as of

and

for the years ended December 31, 2023 and 2022.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting periods. Significant items subject to such estimates and assumptions include the contract research accruals, stock-based compensation expense, the fair value of the Company’s common stock, the income tax valuation allowance, and the fair value determination of the SAFEs. Management’s estimates are based on historical experience and various other assumptions that it believes are reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB, or other standard setting bodies and are adopted by the Company as of the specified effective dates. Unless

otherwise

discussed, the impact of recently issued standards that are not yet effective are not anticipated to have a material impact on the Company’s condensed consolidated financial statements upon adoption.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU

No. 2023-07,

Segment Reporting

(Topic 280) (“ASU

2023-07”),

which enhances the segment disclosure requirements for public entities on an annual and interim basis. Under ASU

2023-07,

public entities will be required to disclose significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss. Additionally, current annual disclosures about a reportable segment’s profit or loss and assets will be required on an interim basis. Entities will also be required to disclose information about the CODM’s title and position at the Company along with an explanation of how the CODM uses the reported measures of segment profit or loss in their assessment of segment performance and deciding whether how to allocate resources. Finally, ASU

2023-07

requires all segment disclosures for public entities that have only a single reportable segment. The amendments in ASU

2023-07

are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and early adoption is permitted. The Company is currently evaluating the impact of ASU

2023-07

on its condensed consolidated financial

statements.

In December 2023, the FASB issued ASU

No. 2023-09,

Income Taxes

(Topic 740) (“ASU

2023-09”),

which enhances the income tax disclosure requirements for public entities on an annual basis. Under ASU

2023-09,

public entities will be required to disclose in their rate reconciliation, on an annual basis, both percentages and amounts in their reporting currency for certain categories in a tabular format, with accompanying qualitative disclosures. The amendments in ASU

2023-09

are effective for fiscal years beginning after December 15, 2024, and early adoption is permitted. The Company is currently evaluating the impact of ASU

2023-09

on its condensed consolidated financial statements.

As described in Note 1, the Company completed its previously announced Merger with AVROBIO on June 20, 2024. The Merger was accounted for as a reverse recapitalization in accordance with GAAP with Legacy Tectonic as the accounting acquirer of AVROBIO. At the effective time of the Merger, substantially all the assets of AVROBIO consisted of cash and cash equivalents, as well as other nominal

non-operating

assets. Under such reverse recapitalization accounting, the assets and liabilities of AVROBIO were recorded at their fair value in AVROBIO’s financial statements at the effective time of the Merger, which approximated book value due to the short-term nature. No goodwill or intangible assets were recognized. Consequently, the condensed consolidated financial statements of the Company reflect the historical operations of Legacy Tectonic for accounting purposes together with the issuance of shares to the former shareholders of AVROBIO, the legal acquirer, and a recapitalization of the equity of Legacy Tectonic, the accounting acquirer. The exchange ratio was retroactively applied to all outstanding common shares, convertible preferred shares, stock options and restricted stock of Legacy Tectonic.

As part of the recapitalization, Legacy Tectonic obtained the assets and liabilities listed below:

The Company incurred transaction costs of $9.9 million, of which $8.2 million was recorded within accrued expenses and other current liabilities on the condensed consolidated balance sheet, $0.6 million was recorded within accounts payable on the condensed consolidated balance sheet and $1.2

million was paid in cash as of June 30, 2024. This amount was recorded as a reduction to additional

paid-in

capital in the condensed consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the three and six months ended June 30, 2024.

With respect to the CVRs issued in connection with the Merger, the Company believes that any receipt of payments resulting from an AVROBIO disposition of AVROBIO’s pre-closing assets described in the CVR Agreement are highly susceptible to factors outside the Company’s influence that are not expected to be resolved within the timeline outlined in the CVR Agreement, if at all. In particular, these amounts are primarily influenced by the actions and judgments of third parties and the buyers of such assets and are based on the buyers of such assets progressing the specific platform and intellectual property and early stage of research and development programs. If the Company were to record a receivable for such contingent payments, it would also record a corresponding liability. As of June

30, 2024, no

receivables or liabilities were recorded on the condensed consolidated balance sheet relating to such contingent payments.

The following tables present information about financial assets and liabilities measured at fair value on a recurring basis and indicate the level of the fair value hierarchy utilized to determine such fair values (in thousands):

As of June 30, 2024 and December 31, 2023, the Company’s cash equivalents, which were invested in money market funds, were valued based on Level 1 inputs.

There wereno transfers between the Level 1, Level 2 or Level 3 categories during the six months ended June 30, 2024 and 2023.

SAFE Liabilities

From October through December 2023,

entered into multiple SAFE agreements with certain existing investors and received $34.1

million. Prior to redemption, the SAFE liabilities were valued using a probability weighted scenario analysis and discount rates derived by application of the build-up method to reflect the cost of equity. The valuation model required a variety of inputs, including the probability of occurrence of events that would trigger conversion or redemption of the SAFEs, the expected timing of such events, and a discount rate.

Upon the closing of the Merger, the principal balance of the SAFEs was automatically redeemed for 2,752,216 shares of

Legacy

Tectonic common stock at the conversion price of $12.40

per share immediately prior to the Merger closing. As such the valuation inputs utilized to adjust the SAFE liability to fair value upon the closing of the

Merger

was $

12.40.

At closing, shares of

Legacy

Tectonic common stock issued pursuant to the redemption of

SAFEs were converted into

1,470,839 shares of AVROBIO common stock based on the Exchange Ratio, pursuant to the Merger Agreement.

The following table presents activity for the SAFE liabilities that were measured at fair value using significant unobservable Level 3 inputs during the six months ended June 30, 2024 and the year ended December 31, 2023 (in thousands):

Property, equipment and improvements, net is comprised of the following (in thousands):

Depreciation expense was $0.3 million and $0.2 million during the three months ended June 30, 2024 and 2023, respectively, and $0.5 million

during each of the six months ended June 30, 2024 and 2023, which was recorded as follows (in thousands):

Accrued expenses and other current liabilities is comprised of the following (in thousands):

Leases

The Company’s commitments under its operating and finance leases are described in Note 8.

Harvard Agreement

In July 2020, Legacy Tectonic entered into an agreement with the President and Fellows of Harvard College (“Harvard”), for an option fee in the low five digits, whereby Harvard granted Legacy Tectonic an exclusive option to negotiate a worldwide, exclusive, royalty-bearing license under Harvard’s interest in the patent rights covering certain technology that was developed by Harvard. In October 2021, Legacy Tectonic exercised the option and on February 10, 2022, entered into a license agreement (“License Agreement”) with Harvard to conduct research and development activities using certain materials, technology and patent rights owned by Harvard, with the intent to develop, obtain regulatory approval for, and commercialize products. The License Agreement will remain in effect until the expiration of the last valid claim within the patent rights covering a product developed under the License Agreement or the termination of the License Agreement. Management concluded that the acquisition of patents and materials received under the License Agreement represents an asset acquisition of an

in-progress

research and development asset without future alternative use; therefore, any consideration paid was expensed.

As consideration for the License Agreement,

agreed to pay Harvard a

license fee, consisting of a cash payment due in three equal annual installments, in total amounting to $170,000 and 227,486 shares of common stock. The installments became due on July 2, 2022 (“First Payment Due Date”) and the first and second anniversaries of the First Payment Due Date. The first payment of $56,666 was paid in July 2022. The common stock issued to Harvard had a fair value of $0.4 million. Both the cash payment and the issuance of shares were expensed to research and development during the year ended December 31, 2022. The second payment of $56,666 was made in July 2023. The remaining installment amount of $56,668 is due in July 2024.

The Company also will be responsible for payment of (1) annual maintenance fees ranging from the low five digits to the low six digits during the term of the License Agreement (through the first commercial sale of a royalty-bearing product); (2) royalty payments as a percentage in the low single digits of the annual net sales that the Company generates from products that utilize the license technology (“Licensed Products”) and royalty payments as a percentage in the low single digits of the annual net sales that the Company generates from

know-how

enabled product licenses

(“Know-How

Enabled Products”) and (3) a percentage between

10-20%

of all

non-royalty

income received by the Company under sublicenses, strategic partnerships and

know-how

enabled product licenses that utilize the license technology. Subsequent to the first commercial sale of a royalty-bearing product, annual maintenance fees will increase to a low six digits for the remainder of the term of the License Agreement. The royalty term from sales of Licensed Products will terminate on a

country-by-country

and

product-by-product

basis on the earlier of (i) the expiration of the patent rights covering the product, expected to be no earlier than May 2041, and (ii) the termination of the License Agreement.

The royalty term from sales of

Know-How

Enabled Products will terminate on the earlier of (i) ten years after the first commercial sale of the first

Know-How

Enabled Product and (ii) twelve years after the first commercial sale of the first Licensed Product. There was $0.1 million due to Harvard as of June 30, 2024. During the three months ended June 30,

2024 and 2023,

the Company paid less than $

0.1 million and $0.1 million, respectively, and during the six months ended June 30, 2024 and 2023, the Company paid $0.1 million and $0.2 million, respectively, to Harvard.

Alloy Therapeutics License Agreement

On November 29, 2021,

executed a license agreement with Alloy Therapeutics, LLC (“ATX”), whereby the Company will use ATX technology for the purpose of preclinical development, clinical development and commercialization of potential product candidates, for an initial period of three years, with an option to extend the term for an additional two years. The Company will pay ATX a

and

non-creditable

annual fee of $0.1 million on each anniversary of the agreement. On November 7, 2022,

and ATX amended the agreement and extended the period of payment for the first fee due in May 2023. Additionally, the Company will be responsible for annual partnering fees if the Company decides to pursue clinical development of a product candidate using the ATX technology. The partnering fees may be creditable against future milestone development fees paid by the Company. The Company will also be responsible to pay ATX development milestone payments for the movement of certain product candidates through clinical trials, which range from the low six digits to the low seven digits upon completion of each milestone and amount to $4.8 million in total milestone payments under the license agreement. Provided the Company is able to commercialize a product using ATX technology, the Company will be responsible to pay ATX commercial payments in the low seven digits per year during the first six years of commercial sales, amounting to an amount in the high eight digits in total commercial payments under the license agreement.

During the three months ended June 30, 2024 and 2023, the Company paid $

0 and $0.1 million to ATX, respectively, and during the six months ended June 30, 2024 and 2023, the Company paid $0.1 million and $0.1 million to ATX, respectively.

Adimab Agreement

On May 1, 2023, Legacy Tectonic entered into a discovery agreement with Adimab, LLC (“Adimab”), an antibody discovery company, whereby Legacy Tectonic and Adimab are collaborating on human antibody discovery in accordance with an agreed upon research program. Legacy Tectonic paid an upfront technology access fee totaling

$20,000 upon execution of the agreement.

The Company also will be responsible for payment of (1) quarterly funding equal to 100% of the actual full-time employee (“FTE”) expended by Adimab in the performance of its obligations in accordance with the agreed upon research program at an annual rate of $0.4 million per FTE (subject to annual consumer price index increases) per the agreement, (2) delivery fees equal to $0.1 million upon both Adimab’s initial delivery of sequences or physical materials and completion pursuant to the research program (initial and completion fees payable once per target for a total of up to $0.4 million), (3) a

non-creditable,

fee of $0.5 million upon the exercise of an option to obtain the licenses and assignments for information discovered during the research program, (4) development milestone payments for the movement of certain product candidates thought clinical trials, which range in the low seven digits, and (5) royalty payments based on the annual net sales that the Company generates from products that utilize Adimab technology. The Company has the right to terminate the agreement if certain criteria are met. As of June 30, 2024, the Company recorded $0.1 million of costs associated with the FTEs in accrued expenses and other current liabilities and $0

of discovery delivery fees in accounts payable.

During the three months ended June 30, 2024 and 2023, the Company paid $0.2 million and less than $0.1 million to Adimab, respectively. During the six months ended June 30, 2024 and 2023, the Company paid $0.3 million and less than $0.1 million to Adimab, respectively.

Indemnification Agreements

In accordance with the Company’s amended and restated certificate of incorporation (“ARCOI”) and certain indemnification agreements, the Company indemnifies certain officers and directors for specified events or occurrences, subject to certain limits, in which the officer or director is or was serving at the Company’s request in such capacity.

The Company enters into certain types of contracts that contingently requires it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) the Company’s bylaws, under which it must indemnify directors and executive officers, and may indemnify other officers and employees, for liabilities arising out of their relationship with the Company, (ii) contracts under which it must indemnify directors and certain officers and consultants for liabilities arising out of their relationship, and (iii) procurement, service or license agreements under which the Company may be required to indemnify vendors, service providers or licensees for certain claims, including claims that may be brought against them arising from the Company’s acts or omissions with respect to the its products, technology, intellectual property or services.

From time to time, the Company may receive indemnification claims under these contracts in the normal course of business. In the event that one or more of these matters were to result in a claim against the Company, an adverse outcome, including a judgment or settlement, may cause a material adverse effect on future business, operating results or financial condition. It is not possible to estimate the maximum amount potentially payable under these contracts since there is no history of prior indemnification claims and the unique facts and circumstances involved in each particular claim will be determinative.

As of June 30, 2024 and December 31, 2023, the Company didnot have any liabilities or other commitments related to indemnification claims.

Litigation

In the normal course of operations, the Company may become involved in various legal proceedings. As of June 30, 2024 and December 31, 2023, the Company has not recorded accruals for probable losses related to any existing or pending litigation as the Company’s management has determined that there are no matters where a potential loss is probable and reasonably estimable. The Company does not believe that any existing or pending claims would have a material impact on the Company’s condensed consolidated financial statements.

has entered into operating leases for office and laboratory facilities and financing leases for laboratory equipment used in research and development activities. The remaining lease terms for its leases range

from approximately

two months

to approximately

3.5

years. These

leases often include options to extend the term of the lease. When it is reasonably certain that the option will be exercised, the impact of the renewal term is included in the lease term for purposes of determining total future lease payments and measuring the ROU asset and lease liability. The Company is not reasonably certain to exercise any available renewal options, which are therefore excluded from the measurement of leases. The Company applies the short-term lease policy election for its real estate and equipment leases, which allows it to exclude from recognition leases with an original term of twelve months or less.

In November 2020,

executed a facilities lease agreement to occupy 18,768 square feet of office and laboratory space, that was subsequently amended on April 21, 2022. The lease requires the Company to pay fixed base rent, which is included in the measurement of the lease, as well as its proportionate share of the facilities operating expenses which are treated as variable lease costs based on the Company’s election to combine lease and associated

non-lease

components and are excluded from the measurement of the lease. The lease expires on January 31, 2026, and contains afive-year renewal option exercisable by the Company which is not included in the measurement of the lease.

The following table sets forth information about lease costs for the three and six months ended June 30, 2024 and 2023 (in thousands):

The following table sets forth information about the Company’s leases for the six months ended June 30, 2024 and 2023 (in thousands):

The following table presents the maturity of the Company’s finance and operating lease liabilities for as of ended June 30, 2024 (in thousands):

Convertible Preferred Stock

Prior to the conversion upon the closing of the Merger, Legacy Tectonic issued Series

A-1,

A-2, A-3 and A-4 convertible preferred stock (the “Preferred Stock”).

Prior to the completion of the Merger, Legacy Tectonic classified the Preferred Stock outside of permanent equity as the shares had redemption features that were not entirely within the control of Legacy Tectonic.

Upon the closing of the Merger, all outstanding shares of the Preferred Stock were converted into

3,647,675 shares of common stock. No

shares of the Preferred Stock were outstanding as of June 30, 2024.

Preferred Stock

Subsequent to consummation of the Merger, the Company authorized the issuance of

10,000,000

shares of new undesignated preferred stock, however

no

such shares were issued or outstanding as of June 30, 2024.

Common Stock

As of June 30, 2024 and as a result of the Merger, the Company’s ARCOI authorized

the Company

to issue

150,000,000

shares of voting common stock of $

0.0001

par value common stock, of which

14,734,323

shares were issued and outstanding

.

Holders of voting common stock are entitled to one vote per share

. In addition, holders of voting common stock are entitled to receive dividends, if and when declared by the Company’s Board of Directors. As of June 30, 2024,

no

dividends had been declared.

The Company has included in issued and outstanding common stock shares of restricted common stock granted by the Company. As of June 30, 2024, there were 14,734,323

shares of

common

stock

issued and outstanding, of which 11,447

relate to shares of restricted common stock (see Note 10).

2019 Equity Incentive Plan

The

Legacy Tectonic 2019 Equity Incentive Plan (the “2019 Plan”) provides employees, consultants and advisors and

non-employee

members of the Board of Directors and its affiliates with the opportunity to receive grants of stock options, stock awards and equity awards. Since inception, Legacy Tectonic has only issued stock options.

2024 Equity Incentive Plan

On June 20, 2024, the Company adopted the 2024 Equity Incentive Plan (the “2024 Plan”) which became effective upon completion of the Merger. The 2024 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance awards and other forms of awards to employees, consultants, and

non-employee

directors of the Company. The terms of stock award agreements, including vesting requirements, are determined by the Company’s Board of Directors and are subject to the provisions of the 2024 Plan. The term of each stock option shall be no more than ten years from the date of grant. Following the effectiveness of the 2024 Plan, no further grants will be made under the 2019 Plan; however, any outstanding equity awards granted under the 2019 Plan will continue to be governed by the terms of the 2019 Plan.

The 2024 Plan initially provided for the issuance of up to 1,938,799 shares of common stock (the “Initial Share Reserve”). Subject to any other adjustments as defined in the 2024 Plan, such aggregate number of shares of common stock will automatically increase on January 1st of each year for a period of ten years commencing on January 1, 2025 and ending on (and including) January 1, 2034, in an amount equal to 5% of the total number of shares of common stock issued and outstanding determined as of the day prior to such increase; provided, however that the board of directors may act prior to January 1st of a given year to provide that the increase for such year will be a lesser number of shares of common stock. The aggregate maximum number of shares of common stock that may be issued pursuant to the exercise of incentive stock options is three multiplied by the Initial Share Reserve.

As of June 30, 2024, there were 1,063,999 shares available for issuance under the 2024 Plan.

2024 Employee Stock Purchase Plan

On June 20, 2024, the Company adopted the 2024 Employee Stock Purchase Plan (the “2024 ESPP”), which became effective upon completion of the Merger. The maximum number of shares of common stock that may be issued under the 2024 ESPP will not exceed 147,343 shares (the “Initial ESPP Share Reserve”), plusthe number of shares of common stock that are automatically added on January 1st of each year for a period of up to ten years commencing on January 1, 2025 and ending on (and including) January 1, 2034, in an amount equal to the lesser of (x) 1% of the total number of shares of common stock issued and outstanding determined as of the day prior to such increase and (y) a number of shares equal to three times the Initial ESPP Share Reserve. Notwithstanding the foregoing, the

B

oard of

D

irectors may act prior to the first day of any calendar year to provide that there will be no January 1st increase in the share reserve for such calendar year or that the increase in the share reserve for such calendar year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. No offering periods under the 2024 ESPP had been initiated as of June 30, 2024.

The option activity below reflects the reverse stock split and retroactive application of the exchange ratio as discussed in Note 1.

A summary of the stock option activity for the six months ended June 30, 2024 is as follows (in thousands except share and per share amounts):

The weighted-average grant-date fair value of options granted during the six months ended June 30, 2024 and 2023 was $13.95 and $2.51 per share, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2024 and 2023 was $3.7 million and $0, respectively, and was $3.7 million and

less than

$0.1

million

during the six months ended June 30, 2024 and 2023, respectively. Forfeitures of options are recorded as incurred.

Cash received from option exercises was $0.6 million for the three and six months ended June 30, 2024 and $0

and less tha

n $0.1 million for the three and six months ended June 30, 2023, respectively

.

The fair values of the options granted in the six months ended June 30, 2023 were estimated based on the Black-Scholes-Merton option pricing model, using the following assumptions:

Restricted Common Stock

Since 2019,

has granted restricted common stock to founders, employees and consultants. The purchase price of the restricted common stock is the estimated fair value on the grant date and the restricted stock is subject to various vesting schedules. Unvested restricted common stock are subject to repurchase rights held by the Company at the original issuance price in the event the restricted common stockholders’ service to the Company is terminated either voluntarily or involuntarily. As of June 30, 2024, there were 11,447 shares of unvested restricted common stock, with a repurchase liability of less than $0.1 million, that is classified in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet.

The following table summarizes restricted stock activity:

The weighted-average grant date fair value of unvested restricted common stock and restricted common stock vested and forfeited for the six months ended June 30, 2024 and 2023 was immaterial.

Stock-Based Compensation Expense

The Company recorded stock-based compensation expense regarding its employees and nonemployees as follows (in thousands):

The Company records compensation expense for options with service based vesting conditions on a straight-line basis over the vesting period. As of June 30, 2024, total compensation cost not yet recognized related to unvested stock options was $

13.8 million, which is expected to be recognized over a weighted-average period of 3.4 years.

During the three and six months ended June 30, 2024 and 2023, the Company recordedno income tax provision or benefit.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize its deferred tax assets, which primarily consist of net operating loss carryforwards. The Company has considered its history of cumulative net losses, estimated future taxable income and prudent and feasible tax planning strategies and has concluded that it is more likely than not that the Company will not realize the benefits of its deferred tax assets. As a result, as of June 30, 2024, the Company has maintained a full valuation allowance against its net deferred tax assets.

Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

The Company’s potential dilutive securities have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. For the three and six months ended June 30, 2024 and 2023, the Company excluded the following potential common shares from the computation of diluted net loss per share attributable to common stockholders for the period because including them would have had an anti-dilutive effect:

Scientific Advisory Board Member

One of the Company’s

co-founders

and former director is a member of the Company’s Scientific Advisory Board (“SAB”) and meets the criteria of a related party. The Company paid the SAB member fees in the amount of less

than $0.1 million during the three months ended June 30, 2024 and 2023, respectively, and less than $

0.1

million during the six months ended June 30, 2024 and 2023 for advisory services provided. There was less than $0.1 million and $0 due to this related party as of June 30, 2024 and December 31, 2023.

License Agreement

Harvard meets the criteria of a related party resulting from the Company’s

co-founders’

employment as professors in the Harvard Department of Molecular Pharmacology. Additionally, both

co-founders

were members of the Board during the six months ended June 30, 2024 and one

co-founder

is a major shareholder in the Company. Core intellectual property utilized by the Company is licensed from Harvard in exchange for license fees, future milestones and royalties, and equity in the Company in the form of common stock.

For the six months ended June 30, 2024 and 2023, the Company paid Harvard $0.1

million and $0.2 million in cash considerations, respectively (see Note 7). Accounts payable to Harvard amounted to less than $

0.1 million and $0.1

million as of June 30, 2024 and December 31, 2023, respectively.

SAFE Agreements

From October through December 2023,

entered into multiple SAFE agreements with certain existing investors and received $34.1

million representing the purchase amount. All investors were considered related parties of the Company. The SAFE agreements had no maturity date, bore no interest, and were redeemable by

upon the occurrence of a triggering event, including the Merger which qualified as a public listing transaction under the SAFE agreements.

As discussed in Note 4, the SAFEs were redeemed for shares of Legacy Tectonic common stock in connection with the closing of the Merger.

The Company has a 401(k) retirement plan (the “Plan”) that covers eligible U.S. employees. Eligible employees may elect to contribute up to the maximum limits, as set by the Internal Revenue Service, of their eligible compensation. The Company’s funding policy is to contribute 3% (“Nonelective Contribution”) of employees’ eligible pay to the Plan. Highly compensated employees (as defined by the Plan) are not eligible to receive the Nonelective Contribution. The Company’s contributions were $0.1 million during each of the three and six months ended June 30, 2024 and 2023 and were recorded as follows: