SPRB US Equity☆

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, 171 subjects across seven 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 first half of 2022. 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 2022. 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 in CAHmelia-204, we plan to meet with the FDA and comparable foreign regulatory authorities to discuss registration.

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

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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, 2020, we incurred a net loss of $29.5 million and used $27.5 million of cash in operations. As of December 31, 2020, we had an accumulated deficit of $60.8 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, 2020, we had cash and cash equivalents of $157.2 million. We believe, based on our current operating plan, that our cash and cash equivalents 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:

▪ implement operational, financial, and management information systems;

▪ hire additional personnel;

▪ operate as a public company; and

▪ obtain, maintain, expand, and protect our intellectual property portfolio.

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.

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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:

▪ external expenses, consisting of:

To date, these expenses have been incurred to advance tildacerfont. These expenses will primarily consist of expenses for the administration of clinical trials as well as manufacturing costs for clinical material supply. We expect that 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 paid for accounting, auditing, consulting, tax, and investor relations services, 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 U.S. Securities and Exchange Commission, or 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 with Silicon Valley Bank.

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Other Income, Net

Other income, net primarily consists of interest income earned on our cash and cash equivalents.

Results of Operations

Comparisons of the Year Ended December 31, 2020 and 2019

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 $23.9 million for the year ended December 31, 2020, compared to $10.8 million for the year ended December 31, 2019. The overall increase in research and development expenses was primarily related to an increase in clinical development, manufacturing, preclinical studies and personnel costs, associated with our progressing clinical development. 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 $5.6 million for the year ended December 31, 2020, compared to $2.3 million for the year ended December 31, 2019. The overall increase in general and administrative expenses was primarily driven by an increase of $1.6 million in professional and consultant service fees related to becoming and operating as a public company,an increase of $1.0 million in personnel-related expenses, and an increase of $0.5 million in administrative expenses primarily related to an increase in directors’ and officers’ liability insurance premiums.

Interest Expense

Interest expense was $0.3 million for the year ended December 31, 2020, compared to $0.1 million for the year ended December 31, 2019. The increase was due to interest expense incurred in 2020 on the Term Loan with Silicon Valley Bank, which we entered into in September 2019.

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Other Income, Net

Other income, net was $0.2 million for the year ended December 31, 2020, compared to $0.1 million for the year ended December 31, 2019. The increase was primarily due to interest income on higher cash and cash equivalents balances in 2020.

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, 2020, we had an accumulated deficit of $60.8 million. As of December 31, 2020, we had cash and cash equivalents of $157.2 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 and cash equivalents 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.

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 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 with the remainder of the First Tranche commitments available through December 31, 2021, and 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 March 22, 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 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.

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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.

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 a rare form of 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:

▪ the number and characteristics of product candidates that we may pursue;

▪ our ability to manufacture sufficient quantities of tildacerfont;

▪ our plan to expand our research and development activities;

▪ the costs associated with securing and establishing commercialization;

▪ the costs of acquiring, licensing, or investing in product candidates;

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 $ (27,519 ) $ (12,617 )

Net cash used in investing activities (74 ) (4 )

Net cash provided by financing activities 181,035 12,433

Cash Used in Operating Activities

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 and 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.

For the year ended December 31, 2019, net cash used in operating activities was $12.6 million, which consisted of a net loss of $13.1 million, partially offset by a net change of $0.3 million in our net operating assets and liabilities and $0.2 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to a net increase in accrued compensation of $0.6 million, partially offset by a net decrease in accounts payable and accrued expenses of $0.2 million and a net increase in prepaid expenses of $0.1 million. The non-cash charges of $0.2 million primarily consisted of stock-based compensation expense and depreciation expense.

Cash Used in Investing Activities

For the year ended December 31, 2020 and 2019, 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, 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.

For the year ended December 31, 2019, cash provided by financing activities was $12.4 million, consisting primarily of net proceeds of $7.9 million from the issuance and sale of Series A redeemable convertible preferred stock and net proceeds of $4.5 million from the issuance of a term loan.

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Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of December 31, 2020 (in thousands):

Payments Due by Period

Less than 1 Year 1 to 3 Years 4 to 5 Years More than 5 years Total

We enter into contracts in the normal course of business with third-party contract manufacturing organizations and CROs for clinical trials, non-clinical studies and testing, 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.

We have also entered into the License Agreement under which we are obligated to make aggregate milestone payments upon the achievement of specified milestones as well as royalty payments. The payment obligations under the License Agreement are contingent upon future events, such as our achievement of specified milestones or generating product sales. As of December 31, 2020, we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. See the section titled “License Agreement with Lilly and Company” above.

Off-Balance Sheet Arrangements

We did not have off-balance sheet arrangements during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

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

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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.

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 made to employees and non-employees 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 share-based awards to employees and non-employees 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.

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 the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. These inputs are as follows:

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For options granted to non-employee consultants, the fair value of these options is also measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected term which is assumed to be the remaining contractual life of the option.

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.

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 and cash equivalents as of December 31, 2020 consisted of readily available checking and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations. We do not believe that our cash or cash equivalents have significant risk of default or illiquidity. While we believe our cash and cash equivalents 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 one financial institution that is in excess of federally insured limits.

Additionally, the interest rate for borrowings under the Loan Agreement is variable. 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

To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not had a formal hedging program with respect to foreign currency. Our expenses are generally denominated in U.S. dollars. Our operations may be subject to fluctuations in foreign currency exchange rates in the future. A hypothetical 10% change in exchange rates during any of the periods presented would not have had a material impact on our financial statements included elsewhere in this Annual Report.

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Effects of Inflation

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation had a material effect on our financial statements included elsewhere in this Annual Report.

Effects of Exchange Rate Fluctuations

We do not believe that 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

Report of Independent Registered Public Accounting Firm 114

Statements of Operations for the Years ended December 31, 2020 and 2019 116

Statements of Cash Flows for the Years ended December 31, 2020 and 2019 118

Notes to Financial Statements 119

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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, 2020 and 2019, 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, 2020 and 2019, 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.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases in 2020 due to the adoption of Accounting Standards Codification Topic 842, Leases.

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 22, 2021

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SPRUCE BIOSCIENCES, INC.

BALANCE SHEETS

(in thousands, except share amounts)

December 31,

ASSETS

Current assets:

Restricted cash 216 —

Right-of-use assets 1,793 —

Current liabilities:

Accrued expenses and other current liabilities 2,496 265

Accrued compensation and benefits 1,085 908

Term loan, net of current portion 1,922 3,193

Lease liability, net of current portion 1,653 —

Commitments and contingencies (Note 7)

Stockholders’ equity (deficit):

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:

Interest expense (323 ) (65 )

Net loss per share, basic and diluted $ (4.93 ) $ (17.12 )

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 Total

Series A Series B Common Stock Paid-In Accumulated Stockholders'

Shares Amount Shares Amount Shares Amount Capital Deficit Equity (Deficit)

Stock-based compensation — — — — — — 196 — 196

Issuance of warrant to purchase common stock — — — — — — 57 — 57

Exercise of common stock options — — — — 57,614 — 51 — 51

Exercise of common stock warrant — — — — 46,358 — — — —

Stock-based compensation — — — — — — 755 — 755

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 755 196

Depreciation and amortization 36 12

Non-cash lease expense 66 —

Changes in operating assets and liabilities:

Prepaid expenses and other current assets (2,883 ) (67 )

Accounts payable and accrued expenses 3,733 (226 )

Accrued compensation and benefits 177 572

Other assets (6 ) (36 )

Net cash used in operating activities (27,519 ) (12,617 )

Cash flows from investing activities

Purchases of property and equipment (74 ) (4 )

Net cash used in investing activities (74 ) (4 )

Cash flows from financing activities

Payment of issuance costs for initial public offering (2,904 ) —

Proceeds from exercise of common stock options 51 —

Proceeds from issuance of term loan, net of issuance costs of $8 — 4,492

Net cash provided by financing activities 181,035 12,433

Cash, cash equivalents, and restricted cash at beginning of period 3,924 4,112

Cash, cash equivalents, and restricted cash at end of period $ 157,366 $ 3,924

Supplemental cash flow data:

Cash paid for interest $ 192 $ 20

Supplemental disclosure of non-cash investing and financing activities:

Right-of-use assets recognized in exchange for lease liabilities $ 1,858 $ —

Fair value of common stock warrant issued in connection with term loan $ — $ 57

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 a rare form of polycystic ovary syndrome (PCOS). The Company is located in Daly City, California and was incorporated in the state of Delaware in April 2016.

Reverse Stock Split

In October 2020, the Company filed an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of shares of the Company’s common stock on a 1-for-6.541 basis (Reverse Stock Split). Adjustments corresponding to the Reverse Stock Split were made to the ratio at which the Company’s redeemable convertible preferred stock converted into common stock in connection with the closing of the initial public offering (IPO). The par value of the common stock and number of shares authorized were not adjusted as a result of the Reverse Stock Split. All references to common stock, options to purchase common stock, warrants, share data, per share data, and related information contained in the financial statements and related footnotes have been retrospectively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

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, 2020, the Company had cash and cash equivalents of $157.2 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, 2020, the Company incurred a net loss of $29.5 million and used $27.5 million of cash in operations. As of December 31, 2020, the Company had an accumulated deficit of $60.8 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

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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.

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 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 designing and developing novel therapies for rare endocrine disorders. 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.

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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, 2020 based on the terms of the lease agreement, which expires in 2025, unless extended.

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,

Restricted cash 216 —

Total cash, cash equivalents and restricted cash $ 157,366 $ 3,924

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;

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.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash and cash equivalents. 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 exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

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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. The Company also elected the package of practical expedients under the transition guidance that will retain the historical lease classification and initial direct costs for any leases that exist prior to adoption of the new guidance and the practical expedient to not separate lease and non-lease components. Prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under previous lease guidance, Accounting Standards Codification (ASC) 840, Leases (Topic 840). See Note 4 to these financial statements for additional detail.

During 2019, leases were accounted for under ASC 840, Leases, and classified as operating leases. The Company’s operating lease agreements include scheduled rent escalations over the lease term. During 2019, rent expense was charged ratably on a straight-line basis over the life of the lease from the date the Company obtains the legal right to use and control the leased space.

Redeemable Convertible Preferred Stock

The Company records redeemable convertible preferred stock at fair value on the dates of issuance, net of issuance costs. Upon the occurrence of certain events that are outside the Company’s control, including a deemed liquidation event such as a merger, acquisition and sale of all or substantially all of the Company’s assets, holders of the redeemable convertible preferred stock can cause redemption for cash. Therefore, redeemable convertible preferred stock is classified as temporary equity (mezzanine) on the balance sheet as events triggering the liquidation preferences are not solely within the Company’s control. The carrying values of the redeemable convertible preferred stock are adjusted to their liquidation preferences if and when it becomes probable that such a liquidation event will occur. Upon the consummation of the IPO, all shares of redeemable convertible preferred stock outstanding were automatically converted into 15,492,019 shares of common stock.

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.

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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 services 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.

Patent Costs

Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain. These costs are included in general and administrative expenses and were immaterial for each of the periods presented.

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, 2020 and 2019, 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 awards, may be granted to employees, non-employee directors, and non-employee consultants.

For equity awards granted to employees and directors, the Company recognizes compensation expense based on the estimated grant-date fair values. The fair value of stock options is determined using the Black-Scholes option

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pricing model. The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award, generally four years. Forfeitures are recorded as they occur.

Stock-based compensation expense related to stock options granted to nonemployees is recognized based on the fair value of the stock options, determined using the Black-Scholes option pricing model, as they are earned. The awards generally vest over the period the Company expects to receive services from the nonemployee. Non-employee stock-based compensation expense was not material in any period presented.

The Company’s determination of the fair value of stock options with time-based vesting 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. The fair value of a stock-based award is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period) on a straight-line basis. Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur.

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, redeemable convertible preferred stock, stock options, employee stock purchase plan and common stock warrants are considered to be potentially dilutive securities. Basic and diluted net loss attributable to common stockholders per share is presented in conformity with the two-class method required for participating securities as the redeemable convertible preferred stock is considered a participating security because it participates in dividends with common stock. The holders of all series of redeemable convertible preferred stock do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. 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.

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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.

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 will adopt on January 1, 2021. The Company is currently assessing the impact of adopting this standard; however, it does not expect the adoption of this guidance to have a material impact on its financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires a lessee to recognize right of use asset and lease liability for all leases with lease terms of more than 12 months, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for the Company beginning January 1, 2022, with early adoption permitted. The Company elected the modified retrospective approach and adopted ASC 842 on January 1, 2020. The Company also elected the package of practical expedients under the transition guidance that will retain the historical lease classification and initial direct costs for any leases that exist prior to adoption of the new guidance and the practical expedient to not separate lease and non-lease components. As of the date of adoption, the Company did not have any leases subject to capitalization under ASC 842, and as such, there was no impact to the financial statements. Since adoption, the Company entered into a new lease and recorded a $1.9 million right-of-use asset and $1.9 million lease liability upon commencement of the lease in September 2020. See Note 5 for further disclosure.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). This new guidance removes, modifies and adds to certain disclosure requirements on fair value measurements in Topic 820. This new guidance became effective for all entities for fiscal years beginning after December 15, 2019. Accordingly, the Company adopted ASU 2018-13 as of January 1, 2020. The adoption did not have any impact on the Company’s financial statements as of and for the year ended December 31, 2020.

3. Fair Value Measurements

The carrying amounts of cash equivalents approximate their fair value based upon quoted market prices. Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash, prepaid expenses, accounts payable and accrued expenses. The Company did not have any financial assets measured nor liabilities recorded at fair value on a recurring or non-recurring basis as of December 31, 2020 and 2019.

The estimated fair value of the term loan was $4.8 million as of December 31, 2020 and was based on estimated interest rates currently available to the Company for debt with similar terms, a Level 3 input.

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4. Balance Sheet Components

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 $ 2,002 $ 265

Accrued general and administrative expenses 245 —

Lease liability, current portion 249 —

Total accrued expenses and other current liabilities $ 2,496 $ 265

Accrued research and development expenses were primarily related to clinical trials, preclinical studies, and manufacturing.

5. 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. As described in Note 2, 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, 2020 was $0.1 million.

In February 2019, the Company entered into a short-term lease for office space with a commencement date of March 2019. Total gross commitments over the 12-month term were $0.2 million. In February 2020, the Company extended the lease for an additional three months for a total of $42 thousand in additional commitments. The lease was terminated in May 2020.

Short-term lease expense for the year ended December 31, 2020 was $0.1 million. Rent expense for the year ended December 31, 2019 was $0.1 million and was recognized under prior Topic 840.

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, with certain adjustments as described in Note 2. 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, 2020, the weighted-average remaining lease term for operating leases was 4.9 years and the weighted-average discount rate was 7.0%. Cash paid for amounts included in the measurement of lease liabilities was $37 thousand for the year ended December 31, 2020.

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, 2020 was minimal.

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Future minimum annual lease commitments under the Company’s non-cancelable operating leases as of December 31, 2020 were as follows (in thousands):

Amount

Total undiscounted future minimum lease payments 2,276

Less: present value discount (374 )

Total discounted future minimum lease payments $ 1,902

Lease liability, net of current portion 1,653

Total operating lease liability $ 1,902

6. 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.

Pursuant to the Loan Agreement, the Company had the ability to request up to $4.5 million of borrowings in two tranches of term loans. In September 2019, the Company requested $2.5 million from the first tranche (the First Tranche) in connection with the entry into the Loan Agreement. The Loan Agreement provided the option to request an additional $2.0 million (the Second Tranche), after the Company reached certain borrowing conditions as stipulated in the Loan Agreement. The Company satisfied these conditions and drew the Second Tranche of $2.0 million in December 2019. Pursuant to the Deferral Agreement, principal payments shall commence in January 2021 and the Term Loan will mature in September 2022.

Outstanding principal balances under the Term Loan bear interest at a floating per annum rate equal to the greatest of: (i) 1% below the prime rate, (ii) 4.25%, or (iii) 1% below the prime rate as of September 23, 2019. Under the Term Loan, as amended by the Deferral Agreement, 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, 2020 (the Interest-Only Period). Following the Interest-Only Period, the outstanding Term Loan balance will be payable in (i) 21 consecutive equal monthly payments of principal beginning on the first day of the calendar month 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 note balance, as of January 1, 2021, 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 totaling 6% of the combined principal amount of the First and Second Tranches, or $0.3 million. The End of Term Payment is being accrued through interest expense using the effective interest method. 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 principal amount of the First and Second Tranches, and any bank expenses become due and payable.

In connection with the First and Second Tranches under 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

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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 November2020, the warrant was net-exercised for 46,358 shares of common stock.

The Company also incurred $8 thousand of debt issuance costs in connection with the Term Loan, which is being amortized using the effective interest method over the life of the Term Loan. The unamortized debt issuance costs and debt discount balance was $24 thousand as of December 31, 2020.

The Term Loan and unamortized discount and debt issuance costs balances as of December 31, 2020 are shown below (in thousands):

Total Term Loan debt $ 4,500

Less: unamortized discount and debt issuance costs (24 )

Total Term Loan, net 4,476

Less: Term Loan, current portion (2,554 )

Term loan, net of current portion $ 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, 2020, 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, 2020, future principal payments per year under the Term Loan were as follows (in thousands):

Amount

The Company made interest payments on the Term Loan of $0.2 million during the year ended December 31, 2020.

As discussed in Note 14, the Loan Agreement was amended in March 2021.

7. 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.

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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, 2020 and management is not aware of any pending or threatened litigation.

8. Capital Structure

Common Stock

As of December 31, 2020 and 2019, the Company was authorized to issue 200,000,000 and 41,000,000 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, 2020, no dividends were declared.

Common stock reserved for future issuance, on an as converted basis, consisted of the following:

December 31,

Series A redeemable convertible preferred stock — 4,280,690

Stock options, available for future issuance 2,637,076 4,598

Employee stock purchase plan, available for future issuance 220,640 —

Common stock warrant — 49,609

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, 2020.

Issued and outstanding redeemable convertible preferred stock as of December 31, 2019, and its principal terms during the year then ended were as follows (in thousands, except share and per share amounts):

During 2020, the Company authorized and issued 73,333,330 shares of Series B preferred stock at $1.20 per share for aggregate net proceeds of $87.6 million.

The holders of redeemable convertible preferred stock had various rights and preferences, including the following:

Liquidation Preference

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or deemed liquidation event, the holders of redeemable convertible preferred stock were entitled to be paid out of the assets of

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the Company, prior and in preference to any distribution to the holders of common stock, an amount equal to the original issuance price, meaning $1.00 per share for each share of Series A redeemable convertible preferred stock (Series A preferred stock) and $1.20 per share for each share of Series B preferred stock, plus all declared but unpaid dividends, if any.

If the assets available for distribution to stockholders were insufficient to pay the holders of shares of the redeemable convertible preferred stock the full amount to which they are entitled, then the entire assets of the Company legally available for distribution would be distributed ratably among the holders of redeemable convertible preferred stock in proportion to the respective amounts each such holder is otherwise entitled to receive.

After the payment to the holders of redeemable convertible preferred stock of the full preferential amount specified above, any remaining assets would be distributed pro rata to the holders of redeemable convertible preferred stock and common stock based upon the respective shares of common stock held by each holder (assuming conversion of all such redeemable convertible preferred stock into common stock). The redeemable convertible preferred stockholders were entitled to receive the greater of the maximum participation amount, meaning $4.00 per share for each share of Series A preferred stock and $4.80 per share for each share of Series B preferred stock, or the amount they would have received if all shares of redeemable convertible preferred stock were converted into common stock immediately prior to such liquidation, dissolution, or wind up.

Conversion

The shares of redeemable convertible preferred stock were convertible into such number of shares of common stock as is determined by dividing the original issue price by the applicable conversion price in effect at the time of conversion, at the option of the holder. The conversion price was initially equal to $6.541 per share for each share of Series A preferred stock and $7.849 per share for each share of Series B preferred stock, subject to certain anti-dilution adjustments. Additionally, each share of redeemable convertible preferred stock would be automatically converted into common stock (i) immediately prior to the closing of the Company’s sale of its common stock in a firm commitment underwritten public offering pursuant to a registration statement under the Securities Act of 1933, as amended, in which (a) the gross cash proceeds to the Corporation (before underwriting discounts, commissions and fees) were at least $50.0 million, (b) the price per share in the public offering was at least $15.6984 per share, and (c) the Company’s shares were listed for trading on the New York Stock Exchange, Nasdaq Global Select Market or Nasdaq Global Market, or (ii) upon the affirmative election of the holders of a majority shares of then-outstanding shares of redeemable convertible preferred stock, voting together as a single class on an as-converted basis, which majority must include the approval of certain holders of Series B preferred stock.

In October 2020, pursuant to the closing of the IPO, the holders of Series A and Series B redeemable convertible preferred stock elected to automatically convert all outstanding shares of Series A and Series B redeemable convertible preferred stock into the Company’s common stock, at the then-effective and applicable conversion rate.

Voting

The holders of redeemable convertible preferred stock were entitled to one vote for each share of common stock into which such redeemable convertible preferred stock could then be converted; and with respect to such vote, such holders have full voting rights and powers equal to the voting rights and powers of the holders of common stock in addition to certain separate voting requirements in favor of the holders of Series A preferred stock and Series B preferred stock.

The holders of Series A preferred stock, voting as a separate class, were entitled to elect two directors to the Board of Directors. The holders of Series B preferred stock, voting as a separate class, were entitled to elect three directors to the Board of Directors. The holders of common stock, voting as a separate class, were entitled to elect one director to the Board of Directors. All common and redeemable convertible preferred stockholders, voting together as a single class on an as-converted basis, were entitled to elect the balance of the total number of directors to the Board of Directors.

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Dividends

The holders of the Series B preferred stock were entitled to receive non-cumulative dividends at an annual rate of 8% of the original issue price of $1.20 per share of the Series B preferred stock when and if declared by the Board of Directors and in preference to any dividends paid to the holders of any other class or series of redeemable convertible preferred stock or common stock. After payment of such Series B preferred stock dividend, the holders of Series A preferred stock were entitled to receive non-cumulative dividends at an annual rate of 8% of the original issue price of $1.00 per share of Series A preferred stock when and if declared by the Board of Directors and in preference to any dividends paid to the holders of common stock. After payment of such Series A preferred stock dividends and Series B preferred stock dividends, any additional dividends would be distributed among the holders of redeemable convertible preferred stock and common stock on a pro rata basis based upon the respective shares of common stock held by each holder (assuming conversion of all such redeemable convertible preferred stock into common stock). No dividends were declared during the years ended December 31, 2020 and 2019.

9. 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. Any shares subject to outstanding stock options or other stock awards that were granted under the 2016 Plan that terminate or expire prior to exercise or settlement; are settled in cash; are forfeited or repurchased because of the failure to vest; or are reacquired or withheld to satisfy a tax withholding obligation or the purchase or exercise price in accordance with the terms of the 2016 Plan will also be reserved for issuance under the 2020 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, 2020.

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A summary of the Company’s stock option activity and related information is as follows (in thousands, except share and per share amounts):

Exercised — — — —

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, 2020. During 2020, the Company granted options to purchase 127,042 shares of common stock with performance criteria stipulating that no shares will vest unless certain financing and other related milestones are achieved. In January 2021, the Board of Directors determined that the performance-based vesting criteria of such options had been satisfied. Additionally, the Company granted an option to purchase 19,003 shares of common stock with the performance criteria stipulating that no shares will vest unless certain clinical development milestones are achieved. As of December 31, 2020, the option awardee had not yet achieved this performance criteria.

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 $0.3 million for the year ended December 31, 2020. There were no options exercised during the years ended December 31, 2019.

As of December 31, 2020, a total of 2,647,684 shares were authorized to be issued under the 2020 Plan and 2,637,076 shares remained available for issuance, and a total of 2,268,163 shares were authorized to be issued under the 2016 Plan and no shares remained available for issuance.

As of December 31, 2019, a total of 863,920 shares were authorized to be issued and 4,598 shares remained available for issuance under the 2016 Plan.

Stock Options Granted to Employees

The Company recognizes compensation expense for stock option awards granted to employees on a straight-line basis over the requisite service period of the award, generally four years. During the years ended December 31, 2020 and 2019, the Company granted options to purchase an aggregate of 1,775,808 and 427,055 shares of common stock to grantees with a weighted-average exercise price of $3.33 and $1.43 per share, respectively. For the years ended December 31, 2020 and 2019, the weighted-average fair value of options granted was $3.56 and $0.98 per

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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

Expected volatility 80.1 % 80.0 %

Risk-free interest rate 0.4 % 1.8 %

Expected dividend rate 0.0 % 0.0 %

The total fair value of options that vested during the years ended December 31, 2020 and 2019 was $0.6 million and $0.1 million, respectively.

Stock Options Granted to Nonemployees

The Company recognizes compensation expense for stock option awards granted to nonemployees as the stock options are earned over the vesting period of the award. During the year ended December 31, 2019, the Company granted options to purchase an aggregate of 58,095 shares of common stock to nonemployees with a weighted-average exercise price of $1.44 per share. The Company did not grant any stock options to nonemployees during the year ended December 31, 2020.

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. As of December 31, 2020, 220,640 shares of common stock remained available for issuance under the ESPP.

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. The initial offering period runs from October 8, 2020 to December 31, 2022.

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, 2020 was $32 thousand. The following range of assumptions were used to calculate stock-based compensation for each stock purchase right granted under the ESPP:

Expected term (in years) 0.7 - 2.2 —

Expected volatility 89.2 - 93.0% —

Risk-free interest rate 0.1 - 0.2% —

Expected dividend rate 0.0% —

Fair Value of Equity-Settled Awards

Prior to the IPO, the fair value of the Company’s common stock was determined by the Board of Directors since it was not publicly traded. The Board of Directors determined fair value of the common stock at the time of

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grant of the option by considering a number of objective and subjective factors including valuation of comparable companies, sales of redeemable convertible preferred stock to third parties, operating and financial performance, the lack of liquidity of capital stock, and general and industry specific economic outlook, amongst other factors. Following the IPO, the fair market value of the Company’s common stock is determined based on the closing price of its common stock on the Nasdaq Global Select Market.

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 the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop. These inputs are as follows:

▪ Forfeitures. The Company accounts for forfeitures as they occur.

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, 2020 and 2019 (in thousands):

Year Ended December 31,

Research and development $ 327 $ 119

General and administrative 428 77

Total stock-based compensation expense $ 755 $ 196

Unrecognized stock-based compensation expense as of December 31, 2020 was approximately $5.0 million, which is expected to be recognized over a weighted-average vesting term of 3.5 years.

10. 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.

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

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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.

11. Income Taxes

The Company has incurred cumulative domestic net operating losses (NOL) since inception and, consequently, has not recorded any income tax expense for the years ended December 31, 2020 and 2019 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 % — %

Nondeductible expenses (0.09 ) % 0.14 %

Change in valuation allowance (41.38 ) % (23.15 ) %

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 $12.2 million and $3.0 million during the years ended December 31, 2020 and 2019, respectively.

Significant components of the Company’s net deferred tax assets and liabilities are as follows (in thousands):

December 31,

Deferred tax assets:

Net operating loss carryforwards $ 16,381 $ 6,259

Valuation allowance for deferred tax assets (19,459 ) (7,236 )

Total net deferred tax assets $ — $ —

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As of December 31, 2020, the Company had federal net operating loss carryforwards of approximately $58.6 million and $58.4 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 $51.4 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 as of December 31, 2020. 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, 2020, the Company had federal and state tax credit carryforwards of approximately $3.0 million and $0.6 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 has derecognized approximately $2 thousand of gross federal tax credit-related deferred tax assets due to the Section 383 limitation as of December 31, 2020. The Company has not derecognized any of the state tax credit-related deferred tax assets because the credits do not expire.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act (the Act) was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company analyzed the provisions of the Act and determined there was no significant impact to its 2020 tax provision.

On June 29, 2020, the California Governor signed Assembly Bill 85 (A.B. 85), which became California law, A.B. 85, which includes several tax measures, provided for a three-year suspension of the use of net operating losses for medium and large businesses and a three-year cap on the use of business incentive tax credits to offset no more than $5.0 million of tax per year. Generally, A.B. 85 suspends the use of net operating losses for taxable years 2020, 2021 and 2022 for taxable income of $1.0 million or more. Since the Company is not expected to generate California source taxable income of more than $1.0 million, no material impact is anticipated at this time.

On December 27, 2020, the “Consolidated Appropriations Act, 2021” (the CAA) was signed into law. The CAA includes provisions meant to clarify and modify certain items put forth in the CARES Act, while providing aid to business affected by the pandemic. The CAA allows deductions for expenses paid for by Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) Program, clarifies forgiveness of EIDL advances, and other business provisions. The Company analyzed the provisions of the CAA and determined there was no significant impact to its 2020 tax provision.

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

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is measured as the largest amount of benefit that is greater than50% likely of being realized upon ultimate settlement.

The Company does not expect the amount of unrecognized tax benefits to materially change in the next 12 months.

The Company had approximately $1.1 million and $0.4 million of unrecognized tax benefits as of December 31, 2020 and 2019, respectively. As the Company has a full valuation allowance on its deferred tax assets, the unrecognized tax benefits have reduced the net deferred tax assets and the valuation allowance in the same amount.

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 $ 398 $ 230

Increase of unrecognized tax benefits taken in prior years 10 —

Increase of unrecognized tax benefits related to current year 686 168

Balance at the end of the year $ 1,094 $ 398

Interest and penalty related to unrecognized tax benefits would be included as income tax expense in the Company’s statements of operations. As of December 31, 2020 and 2019, the Company had not recognized any tax-related penalties or interest in its financial statements.

The Company files income tax returns in the U.S. federal jurisdiction and California state jurisdiction. The Company is not currently under audit by the Internal Revenue Service or any other similar state, local, or foreign authority. All tax years remain open to examination by major taxing jurisdictions to which the Company is subject.

12. 401(k) Retirement Savings Plan

In December 2017, the Company adopted a 401(k) plan (the 401(k) Plan) for all employees who have met certain eligibility requirements. Under the agreement, employees may elect to contribute a portion of their eligible compensation, subject to certain limitations. The Company did not make any matching employer contributions to the 401(k) Plan as of and for the years ended December 31, 2020 and 2019.

13. Net Loss Per Share

The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except share and per share amounts):

Year Ended December 31,

Numerator:

Denominator:

Net loss per share, basic and diluted $ (4.93 ) $ (17.12 )

Basic net loss per share was the same as diluted net loss per share for all periods as the inclusion of potentially dilutive securities would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations were as follows:

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December 31,

Shares subject to outstanding common stock options 2,278,771 859,322

Estimated shares issuable under the employee stock purchase plan 24,118 —

Shares subject to common stock warrants — 49,609

14. Subsequent Events

Stock Option Grants and Modification

In January 2021, the Company granted options to purchase an aggregate of 351,000 shares of common stock to employees pursuant to the 2020 Plan.

During 2020, the Company granted options to certain executive officers to purchase 127,042 shares of common stock with performance criteria stipulating that no shares will vest unless certain financing and other related milestones are achieved. In January 2021, the Board of Directors determined that the performance-based vesting criteria of such options had been satisfied, which was deemed as a modification.

First Amendment to Loan and Security Agreement

In March 2021, the Company and SVB 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 increases the aggregate principal amount of the Term Loan commitment by SVB to up to $30.0 million dollars. Up to $20.0 million is available under the first tranche of the Term Loan (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 with the remainder of the First Tranche commitments available through December 31, 2021, and up to $10.0 million is available under the second tranche (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.

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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 Amendment 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 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 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.

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Item 9. Changes in and Disagreement With Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020. Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Annual Report on Internal Control over Financial Reporting

This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by rules of the SEC for newly public companies.

Attestation Report of the Registered Public Accounting Firm

This Annual Report does not include an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. Additionally, our independent registered public accounting firm will not be required to opine on our internal control over financial reporting until we are no longer an emerging growth company.

Changes in Internal Controls over Financial Reporting

Other than disclosed below, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this Annual Report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

Remediation of Material Weakness

Our management previously identified a material weakness in our internal control over financial reporting primarily related to a lack of timely review over the financial statement close process in connection with the audit of our financial statements as of and for the year ended December 31, 2019. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management determined that we did not have a sufficient complement of qualified personnel within the accounting function and had a lack of segregation of duties to adequately conduct review and analysis of certain routine transactions. In response to the material weakness identified, management developed and implemented the following remedial actions to address the underlying causes of the material weakness, which were subject to senior management review and Audit Committee oversight:

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Our management has concluded, based on evidence obtained in validating the design and operating effectiveness of the controls, that the efforts undertaken to enhance the design of our controls would lead to the prevention or detection of a material misstatement of our financial statements. As such, our management concluded that we have remediated this material weakness as of December 31, 2020.

Other than described above, there was no change in our internal control over financial reporting during the quarter ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

On March 19, 2021, the Company and SVB entered the First Amendment, pursuant to which the Company and SVB amended the Loan Agreement. The First Amendment increases the aggregate principal amount of the Term Loan commitment by SVB to up to $30.0 million dollars. Up to $20.0 million is available under the First Tranche of the Term Loan, $5.0 million of which was advanced immediately to repay the outstanding obligations under the Term Loan prior to the First Amendment with the remainder of the First Tranche commitments available through December 31, 2021, and up to $10.0 million is available under 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.

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 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 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.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item is set forth in our definitive proxy statement to be filed with respect to the 2021 annual meeting of stockholders (the “Proxy Statement”), all of which is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this item is set forth in our Proxy Statement, all of which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is set forth in our Proxy Statement, all of which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is set forth in our Proxy Statement, all of which is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this item is set forth in our Proxy Statement, all of which is incorporated herein by reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

We have filed the following documents as part of this Annual Report:

(a)(1) Financial Statements

The financial statements are included in Item 8. “Financial Statements and Supplementary Data.”

(a)(2) Financial Statement Schedules

All schedules are omitted as information required is inapplicable or the information is presented in the financial statements and the related notes.

(a)(3) Exhibits

Exhibit Number Description

4.4* Description of Common Stock of the registrant.

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23.1* Consent of BDO USA, LLP, independent registered public accounting firm.

24.1 Power of Attorney (see signature pages).

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document