Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes to those statements included later in this Annual Report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, beliefs and expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report, particularly in Item 1A. “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” Unless otherwise indicated, all references in this Annual Report to “Spruce,” the “company,” “we,” “our,” “us” or similar terms refer to Spruce Biosciences, Inc.
Overview
We are a late-stage biopharmaceutical company focused on developing and commercializing novel therapies for rare endocrine disorders with significant unmet medical need. We are initially developing our wholly-owned product candidate, tildacerfont, as the potential first non-steroidal therapy to offer markedly improved disease control and reduce steroid burden for patients suffering from classic congenital adrenal hyperplasia, or CAH. Classic CAH is a serious and life-threatening disease with no known novel therapies approved in approximately 50 years. In a 12-week Phase 2a proof-of-concept clinical trial, tildacerfont-treated adult patients suffering from classic CAH who had poor disease control despite being on standard of care therapy achieved approximately 80% reductions in hormones that are key indicators of poor disease control. Furthermore, over 200 subjects across eight clinical trials to date have been administered tildacerfont with no drug-related SAEs reported.
We have initiated CAHmelia-203, a placebo-controlled, double-blind Phase 2b clinical trial in adult patients with classic CAH with poor disease control and anticipate topline results in the second half of 2023. We have also initiated CAHmelia-204, a second Phase 2b clinical trial in adult patients with classic CAH with good disease control focused on glucocorticoid reduction and anticipate topline results in the second half of 2024. Based on post-hoc analyses of our clinical data to date, we have chosen to target two distinct groups of classic CAH patients with either good disease control or poor disease control. These two groups, which together make up the entire classic CAH patient population, have differing disease challenges centered on excessive adrenal androgen levels or excessive glucocorticoid usage, both of which have the potential to be addressed by treatment with tildacerfont, if approved. We believe our strategy to study CAH patients in these two enriched sub-populations may enable us to observe clinically meaningful outcomes. Additionally, we believe these two clinical trials will provide sufficient patient exposures for our registrational safety database. Assuming positive results from these clinical trials, we plan to meet with the FDA and certain comparable foreign regulatory authorities to discuss registration.
In addition, we are investigating tildacerfont for the treatment of classic CAH in children. We believe there is a significant medical need to provide androgen-lowering and glucocorticoid-sparing therapies to pediatric classic CAH patients to reduce the risk of premature puberty and the adverse effects of glucocorticoids, including growth inhibition and short-stature as adults. We have initiated a Phase 2 open-label clinical trial, which will utilize a sequential three cohort design, to evaluate the safety and pharmacokinetics of tildacerfont in children six to 17 years of age with classic CAH. We anticipate topline safety results from cohort 1 of the Phase 2 open-label clinical trial by the first half of 2023. We have also submitted a PIP to PDCO of the EMA regarding a registrational program in children with classic CAH. PDCO issued an opinion on its agreement with the proposed PIP of tildacerfont for the treatment of CAH which endorsed the clinical program to evaluate the safety, tolerability and efficacy of tildacerfont for the treatment of CAH in patients from one year of age to less than 18 years of age. PDCO also granted a waiver for the treatment of CAH in patients less than one year of age.
Beyond classic CAH, we believe tildacerfont has potential utility in polycystic ovary syndrome, or PCOS, and in a range of diseases where the underlying biology supports a need to reduce excess secretion of or hyperresponsiveness to adrenocorticotropic hormone, or ACTH. PCOS is a hormonal disorder common among females of reproductive age affecting nearly five million females in the United States and approximately 115 million females worldwide. PCOS is characterized by elevated levels of androgens, cysts in the ovaries, and irregular periods. We have identified a subpopulation of patients where elevated levels of adrenal androgens are the cause of disease. We believe that tildacerfont may present a novel mechanism to reduce ACTH and provide a therapeutic
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option for females with PCOS. By leveraging our existing Phase 1 program, which includes safety, tolerability, and pharmacokinetics of tildacerfont, we have initiated a Phase 2 proof-of-concept clinical trial. The Phase 2 proof-of-concept clinical trial is a randomized, placebo-controlled, dose escalation trial which will evaluate the safety and efficacy of tildacerfont titrated to 200 mg QD compared to placebo over 12 weeks of treatment in subjects with PCOS and elevated adrenal androgens as measured by dehydroepiandrosterone sulfate, or DHEAS, levels at baseline. We anticipate topline results from the Phase 2 proof-of-concept clinical trial by the first half of 2023.
Since our inception in November 2014, we have focused primarily on raising capital, establishing and protecting our intellectual property portfolio, organizing and staffing our company, business planning, and conducting preclinical and clinical development of, and manufacturing development for, our product candidate, tildacerfont. We have no products approved for commercial sale and have not generated any revenue to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development of tildacerfont and any future product candidates. We intend to build a highly specialized commercial organization to support the commercialization of tildacerfont, if approved, in the United States and Europe. Given a relatively small number of endocrinologists and specialists treat a large proportion of patients with classic CAH, we believe this market can be effectively addressed with a modest-sized targeted commercial sales force, alongside various high-touch patient initiatives. If tildacerfont is approved for additional indications, we plan to leverage our rare disorder commercial infrastructure and expertise to efficiently address those patient populations. We may also either build a commercial infrastructure or opportunistically seek strategic collaborations to benefit from the resources of biopharmaceutical companies specialized in either relevant disease areas or geographies.
We rely, and expect to continue to rely, on third parties for the manufacture of tildacerfont for preclinical studies and clinical trials, as well as for commercial manufacture if tildacerfont obtains marketing approval. We also rely, and expect to continue to rely, on third parties to package, label, store, and distribute tildacerfont, if marketing approval is obtained. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment, and personnel while also enabling us to focus our expertise and resources on the development of tildacerfont.
Since inception, we have incurred significant losses and negative cash flows from operations. During the year ended December 31, 2021, we incurred a net loss of $42.3 million and used $35.9 million of cash in operations. As of December 31, 2021, we had an accumulated deficit of $103.1 million, and we do not expect positive cash flows from operations for the foreseeable future. We expect to continue to incur significant and increasing losses for the foreseeable future, and our net losses may fluctuate significantly from period to period, depending on the timing of expenditures on our planned research and development activities.
In October 2020, we consummated our initial public offering, or IPO, and issued 6,900,000 shares of common stock for net proceeds of $93.4 million, after deducting underwriting discounts and commissions and offering expenses. Since inception through December 31, 2020, we have raised aggregate gross financing proceeds of $224.0 million, including $103.5 million from our IPO in October 2020, $116.0 million from the sale of our redeemable convertible preferred stock and $4.5 million from the issuance of debt. As of December 31, 2021, we had cash, cash equivalents and investments of $121.4 million. We believe, based on our current operating plan, that our cash, cash equivalents and investments as of December 31, 2021 will be sufficient to fund our operations for at least the next 12 months. We have based this projection on assumptions that may be inaccurate and as a result, we may utilize our capital resources sooner than we expect. We expect our expenses will increase significantly in connection with our ongoing activities, as we:
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advance tildacerfont through our ongoing Phase 2b clinical trials in adult patients with classic CAH;
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advance clinical development of tildacerfont in additional indications, including pediatric classic CAH and a subpopulation of females with PCOS;
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pursue regulatory approvals of tildacerfont in adult patients with classic CAH;
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build a highly specialized commercial organization to support the commercialization of tildacerfont, if approved, in the United States and Europe;
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build a commercial infrastructure or opportunistically seek strategic collaborations to benefit from the resources of biopharmaceutical companies specialized in either relevant disease areas or geographies, if tildacerfont is approved for additional indications;
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identify additional indications and formulations for which to investigate tildacerfont in the future and expand our pipeline of product candidates;
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implement operational, financial, and management information systems;
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hire additional personnel;
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operate as a public company; and
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obtain, maintain, expand, and protect our intellectual property portfolio.
In February 2022, the U.S. Securities and Exchange Commission, or the SEC, declared effective a registration statement on Form S-3, or the Shelf Registration, covering the sale of up to $200.0 million of our securities. Also, in February 2022, we entered into an Open Market Sales AgreementSM, or the Sales Agreement, with Jefferies LLC, or Jefferies, pursuant to which we may elect to issue and sell, from time to time, shares of common stock having an aggregate offering price of up to $21.0 million under the Shelf Registration through Jefferies acting as the sales agent and/or principal.
Our business has been and could continue to be adversely affected by the evolving COVID-19 pandemic. For example, the COVID-19 pandemic has resulted in and could result in delays to our clinical trials for numerous reasons including additional delays or difficulties in enrolling patients, diversion of healthcare resources away from the conduct of clinical trials, interruption or delays in the operations of the FDA or other regulatory authorities, and delays in clinical sites receiving the supplies and materials to conduct our clinical trials. At this time, the extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted.
Components of Results of Operations
Operating Expenses
We classify operating expenses into two main categories: (i) research and development expenses and (ii) general and administrative expenses.
Research and Development Expenses
Our research and development expenses consist of external and internal expenses incurred in connection with our research activities and development programs.
These expenses include:
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external expenses, consisting of:
o
clinical development—expenses associated with CROs engaged to manage and conduct clinical trials and other outside services;
o
preclinical studies—expenses associated with preclinical studies performed by vendors;
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manufacturing—expenses associated with contract manufacturing; labeling, packaging, distribution of clinical trial supplies, and consulting;
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other research and development—expenses associated with quality and regulatory compliance; and
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internal expenses, consisting of personnel, including expenses for salaries, bonuses, benefits, stock-based compensation, as well as allocation of certain expenses.
To date, these expenses have been incurred to advance tildacerfont. These expenses will primarily consist of expenses for the conduct of clinical trials as well as manufacturing costs for clinical material supply. We expect that
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significant additional spending will be required to progress tildacerfont through clinical development and regulatory approval.
Research and development expenses are recognized as they are incurred. If deposits are required by external vendors, a portion of the deposit is included as a prepaid expense until sufficient progress has occurred to amortize the deposit to expense in the statement of operations.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and stock-based compensation expense) for personnel in executive, finance, and other administrative functions. General and administrative expenses also include legal fees, professional fees, insurance costs, facility costs not otherwise included in research and development expenses, and public company expenses such as costs associated with compliance with the rules and regulations of the SEC, and those of the Nasdaq Stock Market, Inc., or Nasdaq, listing rules.
We expect that our general and administrative expenses will continue to increase in the foreseeable future as additional administrative personnel and services are required to manage these functions of a public company, as we advance tildacerfont through clinical development and regulatory approval.
Interest Expense
Interest expense consists of interest incurred and non-cash amortization of debt discount and issuance costs in connection with the Term Loan, provided pursuant to the Loan Agreement, as amended by the First Amendment.
Other Income, Net
Other income, net primarily consists of interest income earned on our cash, cash equivalents and investments.
Results of Operations
Comparisons of the Year Ended December 31, 2021 and 2020
The following table summarizes our results of operations for the periods presented (in thousands):
Year Ended December 31,
Operating expenses:
Research and Development Expenses
Research and development expenses were $30.6 million for the year ended December 31, 2021, compared to $23.9 million for the year ended December 31, 2020. The overall increase in research and development expenses was primarily related to an increase in clinical activities associated with progressing clinical development of tildacerfont and personnel costs. The overall increase in personnel costs was primarily driven by non-cash
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stock-based compensation expense of $0.7 million. The following table sets forth the primary external and internal research and development expenses for the periods presented below (in thousands).
Year Ended December 31,
External expenses:
Internal expenses:
General and Administrative Expenses
General and administrative expenses were $11.4 million for the year ended December 31, 2021, compared to $5.6 million for the year ended December 31, 2020. The overall increase in general and administrative expenses was primarily driven by an increase of $3.8 million in personnel-related expenses, an increase of $1.5 million related to directors’ and officers’ liability insurance premiums, and an increase of $0.5 million in professional fees related to operating as a public company.
Interest Expense
Interest expense was $0.3 million for the year ended December 31, 2021, compared to $0.3 million for the year ended December 31, 2020.
Other Income, Net
Other income, net was $0.1 million for the year ended December 31, 2021, compared to $0.2 million for the year ended December 31, 2020. The decrease was primarily due to lower interest rate earned on lower cash, cash equivalents and investment balances in 2021.
Liquidity and Capital Resources
Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from operations. We anticipate that we will continue to incur net losses for the foreseeable future. As of December 31, 2021, we had an accumulated deficit of $103.1 million. As of December 31, 2021, we had cash, cash equivalents and investments of $121.4 million. In October 2020, we consummated our IPO and issued 6,900,000 shares of common stock for net proceeds of $93.4 million, after deducting underwriting discounts and commissions and offering expenses. We believe, based on our current operating plan, that our cash, cash equivalents and investments as of December 31, 2021 will be sufficient to fund our operations for at least the next 12 months.
Loan Agreement
In September 2019, we entered into the Loan Agreement with Silicon Valley Bank providing for the Term Loan. Pursuant to the Loan Agreement, we requested $2.5 million from the first tranche in connection with the entry into the Loan Agreement, which is currently outstanding, and we drew the second tranche of $2.0 million in December 2019.
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In April 2020, we and Silicon Valley Bank entered into the Deferral Agreement whereby we and Silicon Valley Bank agreed to extend the repayment dates of all monthly payments of principal due and the maturity date with respect to the Term Loan by six months. In March 2021, we entered into the First Amendment with Silicon Valley Bank. The First Amendment increased the aggregate principal amount of the Term Loan commitment by Silicon Valley Bank to up to $30.0 million. Up to $20.0 million is available under the first tranche of the Term Loan, or the First Tranche, $5.0 million of which was advanced immediately to repay the outstanding obligations under the Term Loan prior to the First Amendment. The remainder of the First Tranche commitments, or $15.0 million, expired on December 31, 2021. Up to $10.0 million is available under the second tranche, or the Second Tranche, subject to the completion of certain clinical and financial milestones which Second Tranche commitment is available through December 31, 2022. Pursuant to the First Amendment, the Term Loan will mature on January 1, 2026. As of December 31, 2021, we have $5.0 million outstanding under the Term Loan.
The Loan Agreement, as amended by the Deferral Agreement and the First Amendment, provides for monthly cash interest-only payments following the funding date of each respective tranche and continuing thereafter through December 31, 2022 to the extent that the Company does not borrow any part of the Second Tranche or December 31, 2023 if the Company has borrowed some or all of the Second Tranche. Outstanding principal balances under the Term Loan, as amended by the First Amendment, bear interest at a floating per annum rate equal to (A) if the Company does not borrow under the Second Tranche, the greater of (x) 1% above the prime rate or (y) 4.25%; or (B) if the Company does borrow under the Second Tranche, the greater of (x) 3% above the prime rate or (y) 6.25%.
Following the interest-only period, the outstanding Term Loan balance will be payable in (i) 37 consecutive monthly payments (or 25 if the Company borrows under the Second Tranche) after the end of the interest-only period and continuing on the same day of each month thereafter, in amounts that would fully amortize such Term Loan balance, as of the first business day of the first month following the amendment interest-only period, over the repayment period, plus (ii) monthly payments of accrued but unpaid interest. The final payment due on the maturity date shall include all outstanding principal and all accrued unpaid interest and an end of term payment, or the End of Term Payment, totaling (x) 6% of the original funded principal amount of the First Tranche if the Company does not borrow under the Second Tranche, or (y) 9.5% of the total original funded principal amount under the First and Second Tranche if the Company does borrow under the Second Tranche.
We may prepay amounts outstanding under the Term Loan at any time provided certain notification conditions are met, in which case, all outstanding principal plus accrued and unpaid interest, the End of Term Payment, a prepayment fee between 1% and 3% of the principal amount of the first and second tranches, and any bank expenses become due and payable.
The Loan Agreement contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interest, including entering into a change in control transaction. The Loan Agreement also contains certain covenants that limit our ability to obtain additional debt financing, including incurring debt from third parties not permitted under the Loan Agreement or incurring liens or encumbrances on our property. While we have not previously breached and are currently in compliance with the covenants contained in the Loan Agreement, we may breach these covenants in the future. Our ability to comply with these covenants may be affected by events and factors beyond our control. In the event that we breach one or more covenants, Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, terminate any commitment to extend further credit and foreclose on the collateral. In addition, if an event of default occurs under the Loan Agreement, Silicon Valley Bank may, among other things, accelerate the Term Loan or do any acts it considers necessary or reasonable to protect its security interest in the collateral under the Term Loan. Events of default include the occurrence of a material adverse change in our business, operations, or condition (financial or otherwise). The occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations.
In connection with the first and second tranches under the Loan Agreement prior to the First Amendment, we issued a warrant to purchase up to an aggregate of 49,609 shares of common stock at $1.44 per share. We determined the initial fair value of the warrant to be $0.1 million using the Black-Scholes option-pricing model. The fair value of the warrant was recorded to equity and also as a debt discount, which is amortized to interest expense using the effective interest method over the term of the Term Loan. The warrant was net-exercised for 46,358 shares of our common stock in November 2020.
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Shelf Registration and Sales Agreement
In February 2022, the SEC declared effective the Shelf Registration covering the sale of up to $200.0 million of our securities. Also, in February 2022, we entered into the Sales Agreement with Jefferies, pursuant to which we may elect to issue and sell, from time to time, shares of common stock having an aggregate offering price of up to $21.0 million under the Shelf Registration through Jefferies acting as the sales agent and/or principal, or the Offering. We have also filed a prospectus supplement with the SEC in connection with the Offering under the shelf Registration. Upon delivery of an issuance notice and subject to the terms and conditions of the Sales Agreement, Jefferies may sell the shares at market prices by any method deemed to be an “at the market offering” as defined in Rule 415(a)(4) promulgated under the Securities Act, including sales made directly on or through The Nasdaq Global Select Market, or Nasdaq, the existing trading market for our common stock. We or Jefferies may suspend or terminate the offering of the shares upon notice to the other party, subject to certain conditions. Jefferies will act as sales agent on a commercially reasonable efforts basis consistent with its normal trading and sales practices and applicable state and federal law, rules and regulations and the rules of Nasdaq. We may instruct Jefferies to not sell the shares if the sales cannot be transacted at or above the price we designate in any issuance notice. We are not obligated to make any sales of the shares under the Sales Agreement.
We have agreed to pay Jefferies commissions for its services of acting as agent of 3.0% of the gross proceeds from the sale of the shares pursuant to the Sales Agreement. We have also agreed to provide Jefferies with customary indemnification and contribution rights. A copy of the Sales Agreement is attached as Exhibit 10.22 to this Annual Report on Form 10-K and is incorporated herein by reference. The foregoing description of the material terms of the Sales Agreement is qualified in its entirety by reference to such exhibit.
The shares will be sold pursuant to the Shelf Registration, and offerings of the shares will be made only by means of the prospectus supplement. This Annual Report on Form 10-K shall not constitute an offer to sell or solicitation of an offer to buy the shares, nor shall there be any sale of the shares in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities law of such state or jurisdiction.
Funding Requirements
To date, we have not generated any revenue. We do not expect to generate any meaningful revenue unless and until we obtain regulatory approval and commercialize tildacerfont or any future product candidates, and we do not know when, or if at all, that will occur. We will continue to require additional capital to develop tildacerfont and fund operations for the foreseeable future. Our primary uses of cash are to fund our operations, which consist primarily of research and development expenses related to our clinical development programs, and to a lesser extent, general and administrative expenses.
At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, tildacerfont or any of our future product candidates. We expect our research and development expenses to increase significantly in the foreseeable future as we continue to invest in research and development activities related to developing tildacerfont, as tildacerfont continues to advance into later stages of development for the treatment of classic CAH in adult patients, as we conduct clinical trials of tildacerfont in pediatric classic CAH and PCOS, as we seek regulatory approvals for tildacerfont, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, the successful development of tildacerfont is highly uncertain, and we may never succeed in achieving regulatory approval for tildacerfont in classic CAH in adult patients or other indications. In addition, we expect to incur additional costs associated with operating as a public company.
We may seek to raise capital through equity or debt financings, collaborative agreements or other arrangements with other companies, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative
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impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including:
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the progress, costs, trial design, results of, and timing of our ongoing and planned clinical trials of tildacerfont;
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the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;
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the number and characteristics of product candidates that we may pursue;
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our ability to manufacture sufficient quantities of tildacerfont;
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our plan to expand our research and development activities;
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the costs associated with manufacturing tildacerfont and establishing clinical and commercial supplies, and sales, marketing, and distribution capabilities;
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the costs associated with securing and establishing commercialization;
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the costs of acquiring, licensing, or investing in product candidates;
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our ability to maintain, expand, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense, and enforcement of any patents or other intellectual property rights;
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our need and ability to retain key management and hire scientific, technical, business, and medical personnel;
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the effect of competing products and product candidates and other market developments;
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the timing, receipt, and amount of sales from tildacerfont and any future product candidates, if approved;
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our need to implement additional internal systems and infrastructure, including financial and reporting systems;
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the economic and other terms, timing of, and success of any collaboration, licensing, or other arrangements which we may enter in the future; and
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the effects of the disruptions to and volatility in the credit and financial markets in the United States and worldwide from the COVID-19 pandemic.
If we raise additional funds by issuing equity securities, our stockholders will experience dilution. If we raise additional capital through debt financing, we may be subject to covenants that restrict our operations including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments, and engage in certain merger, consolidation, or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.
We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and actions taken to slow its spread, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back, or discontinue the development or commercialization of tildacerfont or other research and development initiatives. We also could be required to seek collaborators for tildacerfont and any future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to tildacerfont and any future product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves.
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The amount and timing of our future funding requirements will depend on many factors including the pace and results of our development efforts. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Summary Statement of Cash Flows
The following table sets forth the primary sources and uses of cash, cash equivalents, and restricted cash for the periods presented below (in thousands):
Year Ended December 31,
Net cash used in operating activities $ (35,877 ) $ (27,519 )
Net cash used in investing activities (79,168 ) (74 )
Net cash provided by financing activities 643 181,035
Cash Used in Operating Activities
For the year ended December 31, 2021, net cash used in operating activities was $35.9 million, which consisted of a net loss of $42.3 million, partially offset by and a net change of $2.0 million in our net operating assets and liabilities and by $4.5 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to a net increase in accounts payable and accrued expenses of $1.2 million, a net increase in accrued compensation and benefits of $0.4 million and an increase in prepaid expenses, other current assets and other long-term assets of $0.6 million, partially offset by a net decrease in other liabilities of $0.2 million. The non-cash charges of $4.5 million consisted of stock-based compensation expense, non-cash lease expense, and depreciation and amortization expense.
For the year ended December 31, 2020, net cash used in operating activities was $27.5 million, which consisted of a net loss of $29.5 million, partially offset by a net change of $1.2 million in our net operating assets and liabilities and by $0.9 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to a net increase in accounts payable and accrued expenses of $3.7 million and a $0.3 million net increase in accrued compensation and noncurrent assets and liabilities, partially offset by a net increase in prepaid expenses and other current assets of $2.9 million. The non-cash charges of $0.9 million consisted of stock-based compensation expense, non-cash lease expense, and depreciation and amortization expense.
Cash Used in Investing Activities
For the year ended December 31, 2021, cash used in investing activities was $79.2 million, consisting of purchases of available for sale securities of $79.1 million and $0.1 million related to the purchase of property and equipment.
For the year ended December 31, 2020, cash used in investing activities was less than $0.1 million and related to the purchase of property and equipment.
Cash Provided by Financing Activities
For the year ended December 31, 2021, cash provided by financing activities was $0.6 million, consisting primarily of net proceeds from the issuance of long-term debt and proceeds from exercise of stock options and issuance of shares pursuant to our employee stock purchase plan.
For the year ended December 31, 2020, cash provided by financing activities was $181.0 million, consisting primarily of net proceeds from the issuance of common stock in connection with our IPO and the issuance and sale of Series B redeemable convertible preferred stock.
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Sources and Material Cash Requirements
We are party to the Loan Agreement, as amended by the Deferral Agreement and the First Amendment, with Silicon Valley Bank, and have material cash requirements thereunder. For a description of the terms of the Loan Agreement, see the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Loan Agreement”.
In February 2020, we entered into a non-cancelable operating lease for office space with a commencement date of September 2020. The monthly payments escalate over the 63-month term with total gross commitments of $2.3 million.
We enter into contracts in the normal course of business with third-party contract manufacturing organizations and CROs for clinical trials, non-clinical studies, drug substance and product manufacturing and other services for operating purposes. These contracts are generally cancelable by us upon prior written notice after a certain period. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation.
Critical Accounting Policies, Significant Judgments and Use of Estimates
Our financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses, as well as the related disclosure of contingent assets and liabilities as of the date of the financial statements. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in the notes to our financial statements, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.
Accrued Research and Development Expenses
We record accruals for estimated costs of preclinical, clinical, and manufacturing development, within accrued expenses which are significant components of research and development expenses. A substantial portion of our ongoing research and development activities is conducted by third-party service providers, including CROs. Our contracts with CROs generally include fees such as initiation fees, investigator grants, clinical safety, data management, laboratory expenses, project management, and pass-through expenses. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. We accrue the costs incurred under agreements with these third parties based on estimates of actual work completed in accordance with the respective agreements. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress, or stage of completion or actual timeline (start-date and end-date) of the services and the agreed-upon fees to be paid for such services. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.
If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust accrued expenses or prepaid expenses accordingly, which impact research and development expenses. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.
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Payments associated with licensing agreements to acquire exclusive licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternate commercial use are expensed as incurred.
Stock-Based Compensation Expense
We account for stock-based compensation expense by measuring and recognizing compensation expense for all share-based awards based on estimated grant-date fair values. We use the straight-line method to allocate compensation cost to reporting periods over the requisite service period, which is generally the vesting period. We recognize actual forfeitures by reducing the stock-based compensation expense in the same period as the forfeitures occur.
We estimate the fair value of option awards and shares purchased under our employee stock purchase plan using the Black-Scholes option-pricing valuation model. The Black-Scholes model requires the input of subjective assumptions, including fair value of common stock, expected term, expected volatility, risk-free interest rate, and expected dividend yield, which are described in greater detail below.
The description of the significant assumptions used in the model are as follows:
•
Fair value of common stock.The fair market value of our common stock is determined based on the closing price of our common stock on the Nasdaq Global Select Market.
•
Expected term. The expected term is based on the simplified method, as our stock options have the following characteristics: (i) granted at-the-money; (ii) exercisability is conditioned upon service through the vesting date; (iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are non-transferable and non-hedgeable, or "plain vanilla" options, and we have limited history of exercise data. For the ESPP, the expected term is based on the term of the purchase period.
•
Expected volatility. The expected volatility is estimated based on the historical volatility for comparable publicly traded biopharmaceutical companies. In evaluating similarity, we considered factor such as market capitalization, stage of development, area of specialty, and stock-specific attributes. We will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for our common stock becomes available.
•
Risk-free interest rate. The risk-free interest rate is based on the U.S. constant maturity rates with remaining terms similar to the expected term of the options.
•
Expected dividend yield. We have never paid dividends and do not plan to pay dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.
•
Forfeiture. We account for forfeiture as they occur.
Estimating the fair value of equity-settled awards as of the grant date using the Black-Scholes option pricing model is affected by assumptions regarding several complex variables. Changes in assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally required significant analysis and judgement to develop. We will continue to use judgment in evaluating the expected volatility, expected terms, and interest rates utilized for our stock-based compensation expense calculations on a prospective basis.
The fair value of restricted stock units, or RSUs, including RSUs subject to performance-based vesting conditions, is based on our closing stock price on the date of grant. We recognize compensation expense for time-based RSUs over the requisite service period, which is generally the vesting period of the award.
For options and restricted stock that vest upon the satisfaction of certain performance conditions, we recognize compensation expense when it becomes probable that the performance conditions will be met. When the criteria are deemed probable of being met, we record cumulative compensation expense in the period the performance criteria are deemed probable of being met and recognize the remaining compensation expense on a straight-line basis over the remaining period for which the performance criteria are expected to be completed.
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JOBS Act
We are an “emerging growth company” as defined in the JOBS Act. The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
We could be an emerging growth company until December 31, 2025, although circumstances could cause us to lose that status earlier, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act or if we have total annual gross revenue of $1.07 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our cash, cash equivalents and investments as of December 31, 2021 consisted of $121.4 million in bank deposits, money market funds, U.S. treasury securities, commercial paper and corporate bonds. Such interest-earning instruments carry a degree of interest rate risk. The goals of our investment policy are capital preservation, liquidity, safeguarding of capital and total return. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate exposure. While we believe our cash, cash equivalents and investments do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at financial institutions in excess of federally insured limits.
Additionally, the interest rate for borrowings under the Loan Agreement is variable and for interest-bearing investments is fixed. A hypothetical 10% relative change in interest rates during any of the periods presented would not have had a material impact on our financial statements. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.
Foreign Currency Exchange Risk
Our operations include activities in the United States. In addition, we contract with vendors that are located outside of the United States and certain invoices are denominated in foreign currencies. While our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollar and various foreign currencies, we do not believe that inflation, interest rate changes, or exchange rate fluctuations had a significant impact on our results of operations for any periods presented herein.
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Item 8. Financial Statements and Supplementary Data.
SPRUCE BIOSCIENCES, INC.
INDEX TO FINANCIAL STATEMENTS
Statements of Operations for the Years Ended December 31, 2021 and 2020 117
Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 119
Notes to Financial Statements 120
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Spruce Biosciences, Inc.
Daly City, California
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Spruce Biosciences, Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2020.
San Jose, California
March 14, 2022
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SPRUCE BIOSCIENCES, INC.
BALANCE SHEETS
(in thousands, except share amounts)
December 31,
ASSETS
Current assets:
Short-term investments 46,221 —
Long-term investments 32,459 —
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Term loan, current portion — 2,554
Accrued expenses and other current liabilities 4,613 2,496
Accrued compensation and benefits 1,435 1,085
Term loan, net of current portion 4,878 1,922
Lease liability, net of current portion 1,293 1,653
Commitments and contingencies (Note 8)
Stockholders’ equity:
Accumulated other comprehensive loss (184 ) —
Total liabilities and stockholders’ equity $ 126,486 $ 162,883
The accompanying notes are an integral part of these financial statements.
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SPRUCE BIOSCIENCES, INC.
STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
Year Ended December 31,
Operating expenses:
Other comprehensive loss:
Unrealized loss on available for sale securities (184 ) —
Net loss per share, basic and diluted $ (1.81 ) $ (4.93 )
The accompanying notes are an integral part of these financial statements.
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SPRUCE BIOSCIENCES, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY/(DEFICIT)
(in thousands, except share amounts)
Redeemable Convertible Preferred Stock Additional Accumulated Other Total
Series A Series B Common Stock Paid-In Comprehensive Accumulated Stockholders'
Exercise of common stock options — — — — 57,614 — 51 — — 51
Exercise of common stock warrant — — — — 46,358 — — — — —
Stock-based compensation — — — — — — 755 — — 755
Stock-based compensation — — — — — — 3,958 — — 3,958
Unrealized loss on available for sale securities — — — — — — — (184 ) — (184 )
The accompanying notes are an integral part of these financial statements.
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SPRUCE BIOSCIENCES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense 3,958 755
Depreciation and amortization 68 36
Amortization of premium on available-for-sale investments 121 —
Non-cash lease expense 313 66
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 415 (2,883 )
Accounts payable and accrued expenses 1,149 3,733
Accrued compensation and benefits 350 177
Other assets 197 (6 )
Net cash used in operating activities (35,877 ) (27,519 )
Cash flows from investing activities
Purchases of property and equipment (93 ) (74 )
Purchases of investments (79,075 ) -
Net cash used in investing activities (79,168 ) (74 )
Cash flows from financing activities
Proceeds from issuance of term loan, net of issuance costs of $10 4,990 —
Repayment of term loan (4,770 )
Proceeds from exercise of common stock options 328 51
Payment of deferred offering costs (39 ) —
Net cash provided by financing activities 643 181,035
Cash, cash equivalents, and restricted cash at beginning of period 157,366 3,924
Cash, cash equivalents, and restricted cash at end of period $ 42,964 $ 157,366
Supplemental cash flow data:
Cash paid for interest $ 207 $ 192
Supplemental disclosure of non-cash investing and financing activities:
Deferred offering costs included in accrued expenses $ 52 $ —
Right-of-use assets recognized in exchange for lease liabilities $ — $ 1,858
The accompanying notes are an integral part of these financial statements.
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SPRUCE BIOSCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Principal Activities
Description of Business
Spruce Biosciences, Inc. (the Company) is a late-stage biopharmaceutical company focused on developing and commercializing novel therapies for rare endocrine disorders with significant unmet medical need. The Company is initially developing its wholly-owned product candidate, tildacerfont, as the potential first non-steroidal therapy to offer markedly improved disease control and reduce steroid burden for patients suffering from classic congenital adrenal hyperplasia (CAH) and polycystic ovary syndrome (PCOS). The Company is located in Daly City, California and was incorporated in the state of Delaware in April 2016.
Initial Public Offering
In October 2020, the Company consummated its IPO and issued a total of 6,900,000 shares of common stock, which includes 900,000 shares issued pursuant to the exercise of the underwriters’ option to purchase additional shares, at an offering price of $15.00 per share. In aggregate, the Company received net proceeds of $93.4 million, after deducting underwriting discounts and commissions and offering expenses. Upon the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 15,492,019 shares of common stock.
Liquidity and Capital Resources
As of December 31, 2021, the Company had cash, cash equivalents and investments of $121.4 million, which is sufficient to fund its planned operations for a period of at least twelve months following the issuance of the accompanying financial statements.
The Company has incurred significant losses and negative cash flows from operations. During the year ended December 31, 2021, the Company incurred a net loss of $42.3 million and used $35.9 million of cash in operations. As of December 31, 2021, the Company had an accumulated deficit of $103.1 million and does not expect positive cash flows from operations in the foreseeable future. The Company has funded its operations primarily through the issuance and sale of redeemable convertible preferred stock, debt, and the IPO. In February 2020, the Company issued and sold 36,666,665 shares of Series B redeemable convertible preferred stock (Series B preferred stock) for approximately $43.6 million in net proceeds. In August 2020, the Company issued and sold an additional 36,666,665 shares of Series B preferred stock for approximately $44.0 million in net proceeds.
The Company anticipates that it will need to raise substantial additional financing in the future to fund its operations. In order to meet these additional cash requirements, the Company may seek to sell additional equity or issue debt, convertible debt or other securities that may result in dilution to its stockholders. If the Company raises additional funds through the issuance of debt or convertible debt securities, these securities could have rights senior to those of its shares of common stock and could contain covenants that restrict its operations. There can be no assurance that the Company will be able to obtain additional equity or debt financing on terms acceptable to it, if at all. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting the Company’s ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. The Company’s failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on its business, results of operations, and financial condition.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
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Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses as well as related disclosure of contingent assets and liabilities. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, accrued research and development expenses, valuation of common stock and stock-based compensation, valuation of warrants and income tax and uncertain tax positions. The Company bases its estimates on its historical experience and on assumptions that it believes are reasonable; however, actual results could significantly differ from those estimates.
Risks and Uncertainties
Any product candidates developed by the Company will require approvals from the U.S. Food and Drug Administration (FDA) or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s current and future product candidates will meet desired efficacy and safety requirements to obtain the necessary approvals. If approval is denied or delayed, it may have a material adverse impact on the Company’s business and its financial statements.
The Company is subject to a number of risks similar to other late-stage biopharmaceutical companies including, but not limited to, dependency on the clinical and commercial success of the Company’s product candidate, tildacerfont, ability to obtain regulatory approval of tildacerfont, the need for substantial additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians and consumers, significant competition and untested manufacturing capabilities, and dependence on key individuals and sole source suppliers.
The Company’s business has been and could continue to be adversely affected by the evolving COVID-19 pandemic. For example, the COVID-19 pandemic has resulted in and could result in further delays to the Company’s clinical trials for numerous reasons including additional delays or difficulties in enrolling patients, diversion of healthcare resources away from the conduct of clinical trials, interruption or delays in the operations of the FDA or other regulatory authorities, and delays in clinical sites receiving the supplies and materials to conduct our clinical trials. At this time, the extent to which the COVID-19 pandemic impacts the Company’s business will depend on future developments, which are highly uncertain. The Company will continue to evaluate the impact that these events could have on its future operations, financial position, and results of operations and cash flows.
Segment Reporting
The Company operates and manages its business as one operating segment, which is the business of developing and commercializing novel therapies for rare endocrine disorders with significant unmet medical need. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for allocating and evaluating financial performance. All long-lived assets are maintained in the United States of America.
Cash and Cash Equivalents
The Company considers all highly liquid investments with remaining maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist of amounts invested in money market funds.
Restricted Cash
The Company has cash in a collateral account related to a letter of credit issued on behalf of the Company for the security deposit on the non-cancelable operating lease for an office facility. The collateralized cash in connection with the letter of credit was classified as restricted cash on the balance sheet as of December 31, 2021 based on the terms of the lease agreement, which expires in 2025, unless extended.
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The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed statements of cash flows (in thousands):
December 31,
Total cash, cash equivalents and restricted cash $ 42,964 $ 157,366
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows:
▪
Level 1—Quoted prices in active markets for identical assets and liabilities;
▪
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
▪
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s financial instruments primarily consist of cash and cash equivalents, prepaid expenses, accounts payable, term loan, and accrued expenses. The carrying value of cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The estimated fair value of the term loan is based on estimated interest rates currently available to the Company for debt with similar terms.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful life of the respective asset and begins at the time the asset is placed into service. Maintenance and repairs are charged to expense as incurred, and improvements are capitalized.
The useful lives of property and equipment are as follows:
Computer and office equipment 3 years
Computer software 3 years
Manufacturing machinery and equipment 7 years
Leasehold improvements Lesser of lease term or 15 years
Furniture and fixtures 5 years
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash, cash equivalents and investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash and cash equivalents to the extent recorded in the balance sheet. The Company has not experienced any losses in such accounts and management believes that the Company is not
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exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
Leases
The Company adopted Accounting Standards Update (ASU), No. 2016-02, Leases (Topic 842) effective January 1, 2020.
The Company determines if an arrangement includes a lease at inception. Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. The right-of-use asset includes any lease payments made and excludes lease incentives. The incremental borrowing rate is used in determining the present value of future payments. The Company utilizes its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The lease terms may include options to extend or terminate the lease. Lease expense for minimum lease payments is recognized on a straight-line basis over the non-cancelable lease term. The Company has elected not to recognize a right-of-use asset and lease liability for short-term leases. A short-term lease is a lease with an expected lease term of 12 months or less and which does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. See Note 5 to these financial statements for additional detail.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development expenses include, but are not limited to, personnel costs, fees paid to external entities that conduct certain non-clinical and clinical development activities on our behalf, manufacturing costs, outside service and consulting costs, and allocated overhead, including rent. Assets acquired that are utilized in research and development that have no alternative future use are also expensed as incurred.
Accrued Research and Development Expenses
Clinical trial costs are charged to research and development expense as incurred. The Company accrues for expenses resulting from contracts with clinical research organizations (CROs), consultants, and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. The Company’s policy is to reflect the appropriate expense in the financial statements by matching the appropriate expenses with the period in which services and efforts are expended.
The CRO contracts generally include pass-through fees including, but not limited to, regulatory expenses, investigator fees, laboratory fees and other miscellaneous costs. The Company determines accrual estimates through reports from and discussion with clinical personnel and outside service providers as to the progress or state of completion of trials, or the services completed. The Company estimates accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. The clinical trial accrual is dependent, in part, upon the receipt of timely and accurate reporting from the CROs and other third-party vendors.
If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the accrual accordingly. Payments associated with licensing agreements to acquire exclusive licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternate commercial use are expensed as incurred. Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.
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Income Taxes
The Company accounts for income taxes under the asset and liability method. The Company estimates actual current tax exposure together with assessing temporary differences resulting from differences in accounting for reporting purposes and tax purposes for certain items, such as accruals and allowances not currently deductible for tax purposes. These temporary differences result in deferred tax assets and liabilities. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s statements of operations become deductible expenses under applicable income tax laws or when net operating loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.
The Company must assess the likelihood that the Company’s deferred tax assets will be recovered from future taxable income, and to the extent the Company believes that recovery is not likely, the Company establishes a valuation allowance. The assessment of whether or not a valuation allowance is required often requires significant judgment, including the forecast of future taxable income and on-going prudent and feasible tax planning initiatives. Based upon the weight of available evidence, the Company has determined that net deferred tax assets should be fully offset by a valuation allowance. When the Company establishes or reduces the valuation allowance against its net deferred tax assets, its provision for income taxes will increase or decrease, respectively, in the period such determination is made. As of December 31, 2021 and 2020, the Company maintains a full valuation allowance on its net deferred tax assets.
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merits, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to unrecognized tax benefits.
Stock-Based Compensation
The Company has an equity incentive plan under which various types of equity-based awards including, but not limited to, incentive stock options, non-qualified stock options, and restricted stock units, may be granted to employees, non-employee directors, and non-employee consultants.
For equity awards granted to employees, non-employees, and directors, the Company recognizes compensation expense based on the estimated grant-date fair values.
The fair value of stock options and shares purchased under the Company’s employee stock purchase plan is determined using the Black-Scholes option pricing model. The Company recognizes compensation expense for stock options on a straight-line basis over the requisite service period of the award, which is typically four years.
The fair value of restricted stock units (RSUs), including RSUs subject to performance-based vesting conditions, is based on the grant-date fair value of the Company's stock price. The Company recognizes compensation expense for time-based RSUs over the requisite service period, which is generally the vesting period of the award.
For options and restricted stock that vest upon the satisfaction of certain performance conditions, the Company recognizes compensation expense when it becomes probable that the performance conditions will be met. When the criteria are deemed probable of being met, the Company records cumulative compensation expense in the period the performance criteria are deemed probable of being met and recognizes the remaining compensation expense on a straight-line basis over the remaining period for which the performance criteria are expected to be completed.
The Company’s determination of the fair value of stock options on the date of grant utilizes the Black-Scholes option-pricing model and is impacted by its common stock price as well as other variables including, but not limited to, expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends.
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Net Loss per Share
Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock and potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, outstanding stock options, RSUs, and shares expected to be issued pursuant to the employee stock purchase plan are considered to be potentially dilutive securities. Because the Company has reported a net loss for all periods presented, diluted net loss per share is the same as basic net loss per share for those periods.
Commitments and Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party and records a loss contingency on an undiscounted basis when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective and based on the status of such legal proceedings, the merits of the Company’s defenses, and consultation with legal counsel. Actual outcomes of these legal proceedings may differ materially from the Company’s estimates. The Company estimates accruals for legal expenses when incurred as of each balance sheet date based on the facts and circumstances known to the Company at that time.
Emerging Growth Company Status
The Company is an emerging growth company (EGC) as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for non-EGC’s electing to use the extended transition period for complying with new or revised accounting standards for fiscal years beginning after December 15, 2019, and for EGC’s for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company expects to adopt this ASU on January 1, 2023. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its financial statements.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020 and the Company adopted on January 1, 2021. The adoption did not have any impact on the Company's financial statements for the year ended December 31, 2021.
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3. Cash Equivalents and Investments
Cash equivalents consist of amounts invested in money market funds and are stated at fair value.
Investments comprise U.S. treasury securities, commercial paper, and corporate bonds, which are classified as available for sale securities.
The following table is a summary of amortized cost, unrealized gains and losses, and fair value (in thousands):
Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
As of December 31, 2021, the weighted-average remaining contractual maturities of available for sale securities was approximately 11 months.
There have been no realized gains or losses on available for sale securities for the periods presented. No available for sale securities held as of December 31, 2021 have been in a continuous unrealized loss position for more than 12 months, and unrealized gains and losses are included in “accumulated other comprehensive loss” within stockholders' equity on the condensed balance sheets. As of December 31, 2021, unrealized losses on available for sale securities are not attributed to credit risk and are considered temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the cost basis of the investment will be recovered. The Company believes it has no other-than-temporary impairments on its securities as it does not intend to sell these securities and does not believe it is more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis. To date, the Company has not recorded any impairment charges on securities related to other-than-temporary declines in fair value. The Company’s cash equivalents and short-term investments are due within one year.
4. Fair Value Measurements
The carrying value of cash and cash equivalents, prepaid expenses, accounts payable, term loan, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments.
The following table summarizes the Company's financial assets measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
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Total Level 1 Level 2 Level 3
The Company did not have any financial liabilities recorded at fair value on a recurring or non-recurring basis as of December 31, 2021 and 2020.
For Level 1 investments, the Company uses quoted prices in active markets for identical assets to determine the fair value. For Level 2 investments, the Company uses quoted prices for similar assets sourced from certain third-party pricing services. The third-party pricing services generally utilize industry standard valuation models for which all significant inputs are observable, either directly or indirectly, to estimate the price or fair value of the securities. The primary input generally includes reported trades of or quotes on the same or similar securities. The Company does not make additional judgments or assumptions made to the pricing data sourced from the third-party pricing services.
The estimated fair value of the term loan was $5.0 million as of December 31, 2021 and was based on estimated interest rates currently available to the Company for debt with similar terms, a Level 2 input.
5. Balance Sheet Components
Property and equipment, net
Property and equipment, net consisted of the following (in thousands):
December 31,
Computer and office equipment $ 15 $ 3
Computer software 27 10
Manufacturing machinery and equipment 58 4
Leasehold improvements 7 7
Furniture and fixtures 64 57
Less: accumulated depreciation (31 ) (8 )
Property and equipment, net $ 140 $ 73
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Property and equipment, net is included in other assets on the balance sheets. Depreciation expense was $23 thousand and $5 thousand for the years ended December 31, 2021 and 2020, respectively.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
December 31,
Accrued research and development expenses $ 3,837 $ 2,002
Accrued general and administrative expenses 416 245
Lease liability, current portion 360 249
Total accrued expenses and other current liabilities $ 4,613 $ 2,496
Accrued research and development expenses were primarily related to clinical trials, preclinical studies, and manufacturing.
6. Leases
The Company leases space under non-cancelable operating leases which require the Company to pay base rent, real estate taxes, insurance, general repairs, and maintenance. The Company does not have finance leases. The Company adopted ASC Topic 842 as of January 1, 2020.
In February 2020, the Company entered into a non-cancelable operating lease for office space with a commencement date of September 2020. The monthly payments escalate over the 63-month term with total gross commitments of $2.3 million. The lease includes an option to renew the lease term for an additional period of 60 months. The renewal option is not included in the lease term or minimum lease payments disclosures below as the Company is not reasonably certain to exercise the option. Lease incentives, which relate to rent abatement, were considered in the calculation of the lease liability and right-of-use asset. Lease expense for the year ended December 31, 2021 and 2020 was $0.4 million and $0.1 million, respectively.
Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of the remaining minimum lease payments over the lease term. As the leases do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate based on the information available at the commencement date to determine the lease liability. As of December 31, 2021, the weighted-average remaining lease term for operating leases was 3.9 years and the weighted-average discount rate was 7.0%. Cash paid for amounts included in the measurement of lease liabilities was $0.3 million and $37 thousand for the year ended December 31, 2021 and 2020, respectively.
The Company recognizes monthly operating lease expense on a straight-line basis over the term of the lease. Variable lease expense relates primarily to office lease common area maintenance, insurance, and property taxes, is expensed as incurred, and is excluded from the calculation of the lease liability and right-of-use-asset. Variable lease expense for the year ended December 31, 2021 and 2020 was minimal.
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Future minimum annual lease commitments under the Company’s non-cancelable operating leases as of December 31, 2021 were as follows (in thousands):
Amount
Total undiscounted future minimum lease payments 1,899
Less: present value discount (246 )
Total discounted future minimum lease payments $ 1,653
Lease liability, net of current portion 1,293
Total operating lease liability $ 1,653
7. Term Loan
In September 2019, the Company entered into a Loan and Security Agreement (the Loan Agreement) with Silicon Valley Bank (SVB) providing for a term loan (the Term Loan). In April 2020, the Company and SVB entered into an agreement (the Deferral Agreement) whereby the parties agreed to extend the Interest-Only Period (defined below), repayment dates of all monthly payments of principal due and the maturity date with respect to the Term Loan by six months. All other terms of the Term Loan remained unchanged. The Deferral Agreement was determined to be a debt modification, resulting in a prospective yield adjustment based on the revised terms.
In connection with the Loan Agreement, the Company issued a warrant to purchase up to an aggregate of 49,609 shares of common stock at $1.44 per share. The Company determined the initial fair value of the warrant to be $0.1 million using the Black-Scholes option-pricing model. The fair value of the warrant was recorded to equity and as a debt discount, which was being amortized to interest expense using the effective interest method over the term of the Term Loan. In November 2020, the warrant was net-exercised for 46,358 shares of common stock.
In March 2021, the Company entered into a First Amendment to Loan and Security Agreement (the First Amendment), pursuant to which the Company and SVB amended the Loan Agreement. The First Amendment increased the aggregate principal amount of the Term Loan commitment by SVB to up to $30.0 million. Up to $20.0 million was available under the first tranche of the Term Loan (First Tranche), $5.0 million of which was advanced immediately to repay the outstanding obligations under the Term Loan prior to the First Amendment. The remainder of the First Tranche commitment, or $15.0 million, expired on December 31, 2021. Up to $10.0 million is available under the second tranche (Second Tranche), subject to the completion of certain clinical and financial milestones, which Second Tranche commitment is available through December 31, 2022. Pursuant to the First Amendment, the Term Loan will mature on January 1, 2026. The First Amendment was determined to be a debt modification.
Pursuant to the First Amendment, the Company is required to make monthly payments of interest only commencing on the first day of the month following the funding date of each respective tranche and continuing thereafter through December 31, 2022 to the extent that the Company does not borrow any part of the Second Tranche or December 31, 2023 if the Company has borrowed some or all of the Second Tranche. Outstanding principal balances under the Term Loan, as amended by the First Amendment, bear interest at a floating per annum rate equal to (A) if the Company does not borrow under the Second Tranche, the greater of (x) 1% above the prime rate or (y) 4.25%; or (B) if the Company does borrow under the Second Tranche, the greater of (x) 3% above the prime rate or (y) 6.25%.
Following the interest-only period, the outstanding Term Loan balance will be payable in (i) 37 consecutive monthly payments (or 25 if the Company borrows under the Second Tranche) after the end of the Interest-Only Period and continuing on the same day of each month thereafter, in amounts that would fully amortize such Term Loan balance, as of the first business day of the first month following the Interest-Only Period, over the repayment
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period, plus (ii) monthly payments of accrued but unpaid interest. The final payment due on the maturity date shall include all outstanding principal and all accrued unpaid interest and an end of term payment totaling (x) 6% of the original funded principal amount of the First Tranche if the Company does not borrow under the Second Tranche, or (y) 9.5% of the total original funded principal amount under the First and Second Tranche if the Company does borrow under the Second Tranche (the End of Term Payment). The Company may prepay amounts outstanding under the Term Loan at any time provided certain notification conditions are met, in which case, all outstanding principal plus accrued and unpaid interest, the End of Term Payment, a prepayment fee between 1% and 3% of the commitment amount of the First and Second Tranches, and any bank expenses become due and payable.
The Company incurred $10.0 thousand of debt issuance costs in connection with the First Amendment and had unamortized issuance costs and unamortized debt discount under the Loan Agreement of $2.0 thousand and $16.0 thousand, respectively. The Company recorded these costs, including the unaccreted portion of the final payment obligation under the Loan Agreement as a discount from the carrying value of the Term Loan, which are being amortized using the effective interest method over the life of the First Amendment. The unamortized debt issuance costs and debt discount balance was $0.1 million as of December 31, 2021.
The Term Loan and unamortized discount and debt issuance costs balances as of December 31, 2021 are shown below (in thousands):
Less: unamortized discount and debt issuance costs (122 ) (24 )
Less: Term Loan, current portion — (2,554 )
Term loan, net of current portion $ 4,878 $ 1,922
The Company is subject to customary affirmative and restrictive covenants under the Loan Agreement. The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its current and future assets, other than intellectual property. The Company also agreed not to encumber its intellectual property assets, except as permitted by the Loan Agreement.
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other things, the Company’s failure to fulfill certain obligations under the Loan Agreement and the occurrence of a material adverse change in its business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of lender’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, the lender would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement. As of December 31, 2021, management believes that the Company was in compliance with all financial covenants under the Loan Agreement and there had been no material adverse change.
As of December 31, 2021, future principal payments per year under the Term Loan were as follows (in thousands):
Amount
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The Company made interest payments on the Term Loan of $0.2 million and $0.2 million during the year ended December 31, 2021 and 2020, respectively.
8. Commitments and Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party and records a loss contingency on an undiscounted basis when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective and based on the status of such legal proceedings, the merits of the Company’s defenses, and consultation with legal counsel. Actual outcomes of these legal proceedings may differ materially from the Company’s estimates.
Legal Matters
The Company’s industry is characterized by frequent claims and litigation, including claims regarding intellectual property. As a result, the Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. The Company was not subject to any material legal proceedings during the year ended December 31, 2021 and management is not aware of any pending or threatened litigation.
9. Capital Structure
Common Stock
As of December 31, 2021 and 2020, the Company was authorized to issue 200,000,000 shares of $0.0001 par value common stock, respectively. Holders of the Company’s common stock are entitled to dividends if and when declared by the Board of Directors of the Company (Board of Directors) and after any redeemable convertible preferred share dividends are fully paid. The holder of each share of common stock is entitled to one vote. As of December 31, 2021, no dividends were declared.
Common stock reserved for future issuance, on an as converted basis, consisted of the following:
December 31,
Restricted and performance stock units, issued and outstanding 460,000 —
Employee stock purchase plan, available for future issuance 433,200 220,640
Redeemable Convertible Preferred Stock
Immediately prior to the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 15,492,019 shares of common stock and the related carrying value was reclassified to common stock and additional paid-in capital. There were no shares of redeemable convertible preferred stock outstanding as of December 31, 2021 and 2020.
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10. Equity Incentive Plan and Stock-Based Compensation Expense
2020 Equity Incentive Plan
The Company adopted the 2020 Equity Incentive Plan (the 2020 Plan) in October 2020. The 2020 Plan is a successor to and continuation of the Amended and Restated 2016 Equity Incentive Plan (the 2016 Plan) and provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock or cash-based awards to individuals who are then employees, officers, directors or consultants. A total of 2,647,684 shares of common stock were approved to be 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 automatically increased on the first day of each calendar year during the ten-year term of the 2020 Plan, beginning with January 1, 2021 and ending with January 1, 2030, by an amount equal to 5% of the outstanding number of shares of the Company’s common stock on December 31st of the preceding calendar year or such lesser amount as determined by the Company’s Board of Directors.Following the effectiveness of the 2020 Plan, no further grants will be made under the 2016 Plan; however, shares subject to awards granted under the 2016 Plan will continue to be governed by the 2016 Plan.
Under the Plan, the Board of Directors determines the per share exercise price of each stock option, which for ISOs shall not be less than 100% of the fair market value of a share on the date of grant; provided that the exercise price of an ISO granted to a stockholder who at the time of grant owns stock representing more than 10% of the voting power of all classes of stock (a 10% stockholder) shall not be less than 110% of the fair market value of a share on the date of grant.
The Board of Directors determines the period over which options vest and become exercisable. Options granted to new employees generally vest over a four-year period: 25% of the shares vest on the first anniversary from the vesting commencement date of the option and an additional 1/48th of the shares vest on each monthly anniversary thereafter, subject to the employee’s continuous service through each vesting date.
The Board of Directors also determines the term of options, provided the maximum term for ISOs granted to a 10% stockholder must be no longer than five years from date of grant and the maximum term for all other options must be no longer than ten years from date of grant. If an option holder’s service terminates, options generally terminate three months from the date of termination except under certain circumstances, such as death or disability.
Under the 2020 Plan and the 2016 Plan, individuals can be granted the ability to early exercise their options. There were no shares, related to the early exercise of options, subject to repurchase by the Company as of December 31, 2021. As of December 31, 2021, a total of 3,810,703 shares were authorized to be issued under the 2020 Plan and 2,636,506 shares remained available for issuance, and a total of 1,501,745 shares were authorized for issuance under the 2016 Plan and no shares remained available for issuance.
A summary of the Company’s stock option activity and related information is as follows (in thousands, except share and per share amounts):
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Stock options vested and expected to vest differs from total stock options outstanding as it excludes performance-based stock options for which the performance criteria have not been achieved as of December 31, 2021.
The aggregate intrinsic values of options outstanding and exercisable were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock as of the respective balance sheet date. The total intrinsic value of options exercised was $2.0 million and $0.3 million for the year ended December 31, 2021 and 2020, respectively.
The Company recognizes compensation expense for stock option awards granted to employees and non-employee on a straight-line basis over the requisite service period of the award, generally four years. During the years ended December 31, 2021 and 2020, the Company granted options to purchase an aggregate of 947,917 and 1,775,808 shares of common stock to grantees with a weighted-average exercise price of $10.78 and $3.33 per share, respectively. For the years ended December 31, 2021 and 2020, the weighted-average fair value of options granted was $8.55 and $3.56 per share, respectively, and was estimated using the Black-Scholes option-pricing model, with the following weighted-average assumptions:
Expected term (in years) 6.0 6.0
Risk-free interest rate 0.9 % 0.4 %
Expected dividend rate 0.0 % 0.0 %
Restricted Stock Units (RSUs)
A summary of the Company’s RSU activity and related information is as follows (in thousands, except share and per share amounts):
RSUs
Shares Weight-Average Grant Date Fair Value Per Share
Unvested balance as of December 31, 2020 — $ —
Vested — —
Forfeited — —
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In December 2021, the Company granted 460,000 RSUs, including 230,000 RSUs subject to time-based vesting in installments through June 30, 2023, and 230,000 RSUs subject to performance-based vesting conditions related to the satisfaction of certain clinical development milestones.
2020 Employee Stock Purchase Plan
The Company’s Board of Directors adopted and the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (the ESPP) in October 2020. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15% of their eligible compensation. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company’s common stock as of the offering date or the applicable purchase date. A total of 220,640 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be automatically increased on the first day of each calendar year during the first ten-years of the term of the ESPP, beginning with January 1, 2021 and ending with January 1, 2030, by an amount equal to the lessor of (i) 1% of the outstanding number of shares of the Company’s common stock on December 31st of the preceding calendar year, (ii) 441,280 shares of common stock or (iii) such lesser amount as determined by the Board of Directors.
Except for the initial offering period, the ESPP provides for 24-month offering periods starting every January 1st and July 1st, each consisting of four six-month purchase periods. During the year ended December 31, 2021, 20,043 shares of common stock were issued under the ESPP. As of December 31, 2021, 433,200 shares of common stock remained available for issuance under the ESPP.
Fair Value of Stock Options and ESPP Shares
The fair market value of both stock options and the option component of shares purchased under the ESPP was estimated using the Black-Scholes option pricing model. The description of the significant assumptions used in the model are as follows:
▪
Expected Term. The expected term is based on the simplified method, as the Company’s stock options have the following characteristics: (i) granted at-the-money; (ii) exercisability is conditioned upon service through the vesting date; (iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are non-transferable and non-hedgeable, or “plain vanilla” options, and the Company has limited history of exercise data. For the ESPP, the expected term is based on the term of the purchase period.
▪
Expected Volatility. The expected volatility is estimated based on the historical volatilities for comparable publicly traded biopharmaceutical companies. In evaluating similarity, the Company considered factors such as market capitalization, stage of development, area of specialty, and stock-specific attributes. The Company will continue to analyze the historical stock price volatility and expected term assumptions as more historical data for the Company’s common stock becomes available.
▪
Risk-Free Interest Rate. The risk-free interest rate is based on U.S. Treasury constant maturity rates with remaining terms similar to the expected term of the options.
▪
Expected Dividend Rate. The Company has never paid any dividends and does not plan to pay dividends in the foreseeable future, and, therefore, used an expected dividend rate of zero in the valuation model.
▪
Forfeitures. The Company accounts for forfeitures as they occur.
The Company recognizes compensation expense for stock option awards granted on a straight-line basis over the requisite service period of the award, generally four years. During the years ended December 31, 2021 and 2020, the Company granted options to purchase an aggregate of 947,917 and 1,775,808 shares of common stock to grantees with a weighted-average exercise price of $10.78 and $3.33 per share, respectively.
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For the years ended December 31, 2021 and 2020, the weighted-average fair value of options granted was $8.55 and $3.56 per share, respectively, and was estimated using the Black-Scholes option-pricing model, with the following weighted-average assumptions:
Expected term (in years) 6.0 6.0
Risk-free interest rate 0.9 % 0.4 %
Expected dividend rate 0.0 % 0.0 %
The Company recognizes compensation expense for its ESPP awards on a straight-line basis over the requisite service period for the entire award, typically two years. Total compensation expense related to the ESPP for the year ended December 31, 2021 and 2020 was $0.1 million and $32 thousand, respectively. The following assumptions were used to calculate stock-based compensation for each stock purchase right granted under the ESPP:
Expected term (in years) 1.4 1.5
Expected volatility 78.7 % 90.8 %
Risk-free interest rate 0.1 % 0.2 %
Expected dividend rate 0.0 % 0.0 %
Stock-Based Compensation Expense
The following table summarizes the components of stock-based compensation expense recognized in the Company’s statement of operations during the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
Research and development $ 1,045 $ 327
General and administrative 2,913 428
Total stock-based compensation expense $ 3,958 $ 755
During 2020, the Company granted options to purchase 127,042 shares of common stock to certain executive officers with performance criteria stipulating that no shares will vest unless certain financing and other related milestones are achieved. In January 2021, the Board determined that the performance-based vesting criteria of such options had been satisfied, which was deemed a modification. The fair value of the modified awards was $2.4 million. For the year ended December 31, 2021, the Company recorded stock-based compensation of $0.9 million in connection with the modification.
As of December 31, 2021, there was approximately $5.7 million of unrecognized stock-based compensation expense related to stock options, which is expected to be recognized over an estimated weighted-average vesting term of 2.8 years.
As of December 31, 2021, there was approximately $0.8 million of unrecognized stock-based compensation expense related to RSUs, which is expected to be recognized over an estimated weighted-average vesting term of 1.3 years.
11. License Agreement
In May 2016, the Company entered into a license agreement (the License Agreement), with Eli Lilly and Company (Lilly). Pursuant to the terms of the License Agreement, Lilly granted the Company an exclusive, worldwide, royalty bearing, sublicensable license under certain technology, patent rights, know-how and proprietary materials related to certain compounds, to research, develop, and commercialize such compounds for all pharmaceutical uses.
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As partial consideration for the rights granted to the Company under the License Agreement, the Company made a one-time upfront payment to Lilly of $0.8 million during the year ended December 31, 2016, which was recorded as research and development expense as there was no alternative use due to the early stage of the technology. The Company is also required to pay Lilly up to an aggregate of $23.0 million upon the achievement, during the time the License Agreement remains in effect, of certain milestones relating to the clinical development and commercial sales of products licensed under the License Agreement. Such payments are for predetermined fixed amounts, are paid only upon the first occurrence of each event, and are due shortly after achieving the applicable milestone. In addition, the Company is required to pay Lilly tiered royalties on annual worldwide net sales with rates ranging from mid-single-digits to sub-teens. No additional amounts were paid by the Company to Lilly during any of the periods presented, nor were due as of such dates pursuant to the License Agreement.
The License Agreement will remain in effect, unless earlier terminated, until the expiration of the royalty payment obligations. Royalties are payable on a product-by-product and country-by-country basis from the first commercial sale of the product until the later of (i) the tenth anniversary of the date of first commercial sale in such country, (ii) the expiration in such country of the last-to-expire licensed patent having a valid claim covering the manufacture, use or sale of the licensed product as commercialized in such country, and (iii) the expiration of any data or regulatory exclusivity period for the licensed product in such country.
12. Income Taxes
The Company has incurred cumulative domestic net operating losses (NOL) since inception and, consequently, has no income tax expense for the years ended December 31, 2021 and 2020 due to its net operating loss position.
The reconciliation of the federal statutory income tax rate to the Company’s effective tax rate is as follows:
December 31,
Federal statutory tax rate 21.00 % 21.00 %
State tax, net of federal benefit 6.98 % 6.98 %
Nondeductible expenses (0.38 ) % (0.09 ) %
Change in valuation allowance (32.96 ) % (41.38 ) %
Prior year true-up for state net operating losses - % 6.96 %
Effective tax rate 0 % 0 %
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The net valuation allowance increased by approximately $13.9 million and $12.2 million during the years ended December 31, 2021 and 2020, respectively.
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Significant components of the Company’s net deferred tax assets and liabilities are as follows (in thousands):
December 31,
Deferred tax assets:
Lease liability 463
Valuation allowance for deferred tax assets (33,397 ) (19,459 )
Deferred tax liabilities:
Right-of-use assets (414 ) —
Other (3 ) —
Total deferred tax liabilities (417 ) —
Total net deferred tax assets $ — $ —
As of December 31, 2021, the Company had federal net operating loss carryforwards of approximately $98.6 million and $98.4 million in state net operating loss carryforwards. If not utilized, the federal net operating loss carryforwards incurred before January 1, 2018 will begin to expire in 2036, and state net operating loss carryforwards will begin to expire in 2036. The federal net operating losses of $91.4 million incurred in 2018 and beyond do not expire.
Under Sections 382 and 383 of the Internal Revenue Code (IRC) of 1986, as amended (the Code), if a corporation undergoes an “ownership change,” the company’s ability to use its pre-change net operating loss carryforwards and other pre-change attributes, such as research tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Tax credits are subject to IRC Section 383. In the event of a change in ownership as defined by this code section, the usage of the credits may be limited. Similar rules may apply under state tax laws. As of December 31, 2020, the Company determined that an ownership change occurred on May 2, 2016 and August 7, 2020. As a result of the ownership changes, the Company derecognized an immaterial amount of net operating loss-related deferred tax assets for federal and state purposes. The ability of the Company to use its remaining net operating loss carryforwards is subject to Section 382 limitation and may be further limited if the Company experiences a Section 382 ownership change as a result of future changes in its stock ownership.
As of December 31, 2021, the Company had federal and state tax credit carryforwards of approximately $5.6 million and $1.0 million, respectively. If not utilized, the federal tax credits will begin to expire in 2036 and the state tax credits do not expire. As a result of the previously mentioned ownership changes, the Company derecognized in 2020 approximately $2 thousand of gross federal tax credit-related deferred tax assets due to the Section 383 limitation. The Company has not derecognized any of the state tax credit-related deferred tax assets because the credits do not expire.
Uncertain Income Tax Positions
The Company accounts for uncertainty in income taxes in accordance with ASC 740. Tax positions are evaluated in a two-step process, whereby the Company first determines whether it is more likely than not that a tax position will be sustained upon examination by tax authorities, including resolutions of any related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold, it is then measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
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The Company does not expect the amount of unrecognized tax benefits to materially change in the next 12 months.
The Company had approximately $1.6 million and $1.1 million of unrecognized tax benefits as of December 31, 2021 and 2020, respectively. No liability related to uncertain tax positions is recorded in the financial statements due to the fact the liabilities have been netted against deferred attribute carryovers. The unrecognized tax benefits would not impact the annual effective tax rate if recognized because the Company has recorded a valuation allowance on its deferred tax assets.
A reconciliation of the beginning and ending balance of the unrecognized tax benefits is as follows (in thousands):
December 31,
Balance at the beginning of the year $ 1,094 $ 398