sprb-10q_20200930.htm

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

 

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

 

For the transition period from ___________ to ____________

Commission File Number: 001-39594

 

 

Spruce Biosciences, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

81-2154263

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2001 Junipero Serra Boulevard, Suite 640

Daly City, California

94014

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (415) 655-4168

 

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

 

SPRB

 

Nasdaq Global Select Market

 

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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

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

As of November 9, 2020, the registrant had 23,214,041 shares of common stock, $0.0001 par value per share, outstanding.

 

 


Table of Contents

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Unaudited Condensed Financial Statements for the Three and Nine Months Ended September 30, 2020 and 2019:

1

 

Condensed Balance Sheets

1

 

Condensed Statements of Operations

2

 

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

3

 

Condensed Statements of Cash Flows

5

 

Notes to the Condensed Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29

 

 

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

30

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

83

Item 3.

Defaults Upon Senior Securities

83

Item 4.

Mine Safety Disclosures

83

Item 5.

Other Information

83

Item 6.

Exhibits

84

 

Signatures

85

 

 

 


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

SPRUCE BIOSCIENCES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(in thousands, except share amounts)

 

 

 

September 30,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

72,158

 

 

$

3,924

 

Prepaid expenses

 

 

1,233

 

 

 

215

 

Other current assets

 

 

209

 

 

 

513

 

Total current assets

 

 

73,600

 

 

 

4,652

 

Restricted cash

 

 

216

 

 

 

 

Right-of-use assets

 

 

1,869

 

 

 

 

Deferred offering costs

 

 

2,347

 

 

 

 

Other assets

 

 

453

 

 

 

40

 

Total assets

 

$

78,485

 

 

$

4,692

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

   STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,002

 

 

$

1,878

 

Term loan, current portion

 

 

1,908

 

 

 

1,252

 

Accrued expenses and other current liabilities

 

 

3,469

 

 

 

265

 

Accrued compensation and benefits

 

 

707

 

 

 

908

 

Total current liabilities

 

 

10,086

 

 

 

4,303

 

Term loan, net of current portion

 

 

2,561

 

 

 

3,193

 

Lease liability, net of current portion

 

 

1,738

 

 

 

 

Other liabilities

 

 

95

 

 

 

20

 

Total liabilities

 

 

14,480

 

 

 

7,516

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Series A redeemable convertible preferred stock, $0.0001 par value, 28,000,000

   shares authorized, issued, and outstanding as of September 30, 2020 and

   December 31, 2019; liquidation preference of $28,000 as of September 30, 2020

   and December 31, 2019

 

 

27,813

 

 

 

27,813

 

Series B redeemable convertible preferred stock, $0.0001 par value, 73,333,330 shares

   authorized, issued, and outstanding as of September 30, 2020 and 0 shares

   authorized, issued and outstanding as of December 31, 2019; liquidation value of

   $88,000 as of September 30, 2020 and $0 as of December 31, 2019

 

 

87,633

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 130,518,922 and 41,000,000 shares authorized as

   of September 30, 2020 and December 31, 2019, respectively; 822,022 and 764,408

   shares issued and outstanding as of September 30, 2020 and December 31, 2019,

   respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

1,061

 

 

 

664

 

Accumulated deficit

 

 

(52,503

)

 

 

(31,302

)

Total stockholders’ equity (deficit)

 

 

(51,441

)

 

 

(30,637

)

Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit)

 

$

78,485

 

 

$

4,692

 

 

See accompanying notes to the condensed financial statements.

1


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SPRUCE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,769

 

 

$

2,107

 

 

$

18,040

 

 

$

7,969

 

General and administrative

 

 

1,790

 

 

 

457

 

 

 

3,041

 

 

 

2,004

 

Total operating expenses

 

 

9,559

 

 

 

2,564

 

 

 

21,081

 

 

 

9,973

 

Loss from operations

 

 

(9,559

)

 

 

(2,564

)

 

 

(21,081

)

 

 

(9,973

)

Interest expense

 

 

(79

)

 

 

(5

)

 

 

(245

)

 

 

(5

)

Other income, net

 

 

51

 

 

 

18

 

 

 

125

 

 

 

72

 

Net loss

 

$

(9,587

)

 

$

(2,551

)

 

$

(21,201

)

 

$

(9,906

)

Net loss per share, basic and diluted

 

$

(12.35

)

 

$

(3.34

)

 

$

(27.54

)

 

$

(12.96

)

Weighted-average shares of common stock outstanding, basic and

   diluted

 

 

776,159

 

 

 

764,408

 

 

 

769,766

 

 

 

764,408

 

 

See accompanying notes to the condensed financial statements.

 

 

2


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SPRUCE BIOSCIENCES, INC.

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

(unaudited)

(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)

 

Balance as of January 1, 2020

 

 

28,000,000

 

 

$

27,813

 

 

 

 

 

$

 

 

 

 

764,408

 

 

$

1

 

 

$

664

 

 

$

(31,302

)

 

$

(30,637

)

Issuance of Series B redeemable convertible

   preferred stock, net of issuance costs

   of $352

 

 

 

 

 

 

 

 

36,666,665

 

 

 

43,648

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

32

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,168

)

 

 

(5,168

)

Balance as of March 31, 2020

 

 

28,000,000

 

 

 

27,813

 

 

 

36,666,665

 

 

 

43,648

 

 

 

 

764,408

 

 

 

1

 

 

 

696

 

 

 

(36,470

)

 

 

(35,773

)

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,166

 

 

 

 

 

 

8

 

 

 

 

 

 

8

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96

 

 

 

 

 

 

96

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,446

)

 

 

(6,446

)

Balance as of June 30, 2020

 

 

28,000,000

 

 

 

27,813

 

 

 

36,666,665

 

 

 

43,648

 

 

 

 

771,574

 

 

 

1

 

 

 

800

 

 

 

(42,916

)

 

 

(42,115

)

Issuance of Series B redeemable convertible

   preferred stock, net of issuance costs

   of $15

 

 

 

 

 

 

 

 

36,666,665

 

 

 

43,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,448

 

 

 

 

 

 

43

 

 

 

 

 

 

43

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

218

 

 

 

 

 

 

218

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,587

)

 

 

(9,587

)

Balance as of September 30, 2020

 

 

28,000,000

 

 

$

27,813

 

 

 

73,333,330

 

 

$

87,633

 

 

 

 

822,022

 

 

$

1

 

 

$

1,061

 

 

$

(52,503

)

 

$

(51,441

)

 

See accompanying notes to the condensed financial statements.

3


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SPRUCE BIOSCIENCES, INC.

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

(unaudited)

(in thousands, except share amounts)

 

 

 

 

 

Redeemable Convertible Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Series A

 

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity (Deficit)

 

Balance as of January 1, 2019

 

 

20,000,000

 

 

$

19,872

 

 

 

 

764,408

 

 

$

1

 

 

$

411

 

 

$

(18,214

)

 

$

(17,802

)

Issuance of Series A redeemable convertible

   preferred stock, net of issuance costs

   of $60

 

 

8,000,000

 

 

 

7,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

15

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,119

)

 

 

(4,119

)

Balance as of March 31, 2019

 

 

28,000,000

 

 

 

27,813

 

 

 

 

764,408

 

 

 

1

 

 

 

426

 

 

 

(22,333

)

 

 

(21,906

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77

 

 

 

 

 

 

77

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,236

)

 

 

(3,236

)

Balance as of June 30, 2019

 

 

28,000,000

 

 

 

27,813

 

 

 

 

764,408

 

 

 

1

 

 

 

503

 

 

 

(25,569

)

 

 

(25,065

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

 

 

 

 

 

62

 

Issuance of warrant to purchase common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,551

)

 

 

(2,551

)

Balance as of September 30, 2019

 

 

28,000,000

 

 

$

27,813

 

 

 

 

764,408

 

 

$

1

 

 

$

602

 

 

$

(28,120

)

 

$

(27,517

)

 

 

 

4


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SPRUCE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(21,201

)

 

$

(9,906

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

346

 

 

 

154

 

Depreciation and amortization

 

 

26

 

 

 

3

 

Non-cash lease expense

 

 

26

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(905

)

 

 

49

 

Accounts payable and accrued expenses

 

 

3,731

 

 

 

(137

)

Accrued compensation and benefits

 

 

(201

)

 

 

124

 

Other assets

 

 

(161

)

 

 

 

Other liabilities

 

 

86

 

 

 

3

 

Net cash used in operating activities

 

 

(18,253

)

 

 

(9,710

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(50

)

 

 

(3

)

Net cash used in investing activities

 

 

(50

)

 

 

(3

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of Series A redeemable convertible preferred stock, net of

   issuance costs

 

 

 

 

 

7,941

 

Proceeds from issuance of Series B redeemable convertible preferred stock, net of

   issuance costs

 

 

87,633

 

 

 

 

Payment of deferred offering costs

 

 

(931

)

 

 

 

Proceeds from exercise of stock options

 

 

51

 

 

 

 

Proceeds from issuance of term loan, net of issuance costs of $8

 

 

 

 

 

2,492

 

Net cash provided by financing activities

 

 

86,753

 

 

 

10,433

 

Net increase in cash, cash equivalents and restricted cash

 

 

68,450

 

 

 

720

 

Cash, cash equivalents, and restricted cash at beginning of period

 

 

3,924

 

 

 

4,112

 

Cash, cash equivalents, and restricted cash at end of period

 

$

72,374

 

 

$

4,832

 

Supplemental cash flow data:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

144

 

 

$

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Right-of-use assets recognized in exchange for lease liabilities

 

$

1,894

 

 

$

 

Deferred offering costs included in accounts payable and accrued expenses

 

$

1,416

 

 

$

 

Property and equipment included in accounts payable

 

$

14

 

 

$

 

Fair value of warrant issued in connection with term loan

 

$

 

 

$

37

 

 

See accompanying notes to the condensed financial statements.

5


Table of Contents

 

SPRUCE BIOSCIENCES, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(unaudited)

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 adult patients suffering from classic congenital adrenal hyperplasia (CAH). 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 Company’s 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.

Liquidity and Capital Resources

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 approximately $96.3 million, after deducting underwriting discounts and commissions of approximately $7.2 million and before deducting offering related 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. See Note 11 to these condensed financial statements for additional details.

As of September 30, 2020, the Company had cash and cash equivalents of $72.2 million, which together with the net proceeds from the IPO of $96.3 million, will be sufficient to fund its planned operations for a period of at least twelve months following the issuance of the accompanying condensed financial statements.

The Company has incurred significant losses and negative cash flows from operations. During the nine months ended September 30, 2020, the Company incurred a net loss of $21.2 million and used $18.3 million of cash in operations. As of September 30, 2020, the Company had an accumulated deficit of $52.5 million and does not expect positive cash flows from operations in the foreseeable future. In recent years, the Company has funded its operations primarily through the issuance and sale of redeemable convertible preferred stock and debt. In February 2020, the Company issued and sold 36,666,665 shares of Series B redeemable convertible preferred stock (Series B preferred stock) for approximately $43.6 million in net proceeds. In August 2020, the Company issued and sold an additional 36,666,665 shares of Series B preferred stock for approximately $44.0 million in net proceeds.

The Company anticipates that it will need to raise substantial additional financing in the future to fund its operations. In order to meet these additional cash requirements, the Company may seek to sell additional equity or issue debt, convertible debt or other securities that may result in dilution to its stockholders. If the Company raises additional funds through the issuance of debt or convertible debt securities, these securities could have rights senior to those of its shares of common stock and could contain covenants that restrict its operations. There can be no assurance that the Company will be able to obtain additional equity or debt financing on terms acceptable to it, if at all. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting the Company’s ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. The Company’s failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on its business, results of operations, and financial condition.

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2. Summary of Significant Accounting Policies

Interim Condensed Financial Statements

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and applicable rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed balance sheet as of September 30, 2020, the condensed statements of operations for the three and nine months ended September 30, 2020 and 2019, the condensed statements of redeemable convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2020 and 2019, and the condensed statement of cash flows for the nine months ended September 30, 2020 and 2019 are unaudited. The interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal, recurring adjustments that are necessary to present fairly the Company’s results for the interim periods presented. The condensed balance sheet as of December 31, 2019, is derived from the Company’s audited financial statements. The results of operations for the three and nine months ended September 30, 2020, are not necessarily indicative of the results to be expected for the year ending December 31, 2020, or for any other future annual or interim period.

These interim condensed financial statements should be read in conjunction with the Company’s audited financial statements and the related notes thereto for the year ended December 31, 2019, which are included in the Company’s prospectus, dated October 8, 2020 that forms a part of the Company’s Registration Statement on Form S-1 (File. Nos. 333-248924 and 333-249397) as filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 9, 2020.

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 and cannot be predicted. The Company will continue to evaluate the impact that these events could have on its operations, financial position, and results of operations and cash flows during fiscal year 2020 and beyond.

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.

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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 September 30, 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):

 

 

 

September 30,

 

 

 

2020

 

 

2019

 

Cash and cash equivalents

 

$

72,158

 

 

$

4,832

 

Restricted cash

 

 

216

 

 

 

 

Total cash, cash equivalents and restricted cash

 

$

72,374

 

 

$

4,832

 

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1—Quoted prices in active markets for identical assets and liabilities;

 

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments primarily consist of cash and cash equivalents, prepaid expenses, accounts payable, term loan, and accrued expenses. The carrying value of cash and cash equivalents, prepaid expenses, accounts payable, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The estimated fair value of the term loan is based on estimated interest rates currently available to the Company for debt with similar terms.

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.

Deferred Offering Costs

The Company capitalizes within other assets certain legal, accounting, and other third-party fees that are directly related to the Company’s in-process equity financings, including the IPO, until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ equity (deficit) as a reduction of the proceeds received from the offering. As of September 30, 2020, $2.3 million of deferred offering costs were capitalized and recorded on the condensed balance sheet. The deferred offering costs were reclassified to additional paid-in-capital upon the consummation of the IPO in October 2020. See Note 11 to these condensed financial statements for additional details.

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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 8 to these condensed 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 in October 2020, all shares of redeemable convertible preferred stock outstanding were automatically converted into 15,492,019 shares of common stock. See Note 11 to these condensed financial statements for additional details.

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 nonclinical and clinical development activities on our behalf, manufacturing costs, outside service and consulting costs, and allocated overhead, including rent. Assets acquired that are utilized in research and development that have no alternative future use are also expensed as incurred.

Accrued Research and Development Expenses

Clinical trial costs are charged to research and development expense as incurred. The Company accrues for expenses resulting from contracts with clinical research organizations (CROs), consultants, and clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided to us under such contracts. The Company’s policy is to reflect the appropriate expense in the financial statements by matching the appropriate expenses with the period in which services and efforts are expended.

The CRO contracts generally include pass-through fees including, but not limited to, regulatory expenses, investigator fees, laboratory fees and other miscellaneous costs. The Company determines accrual estimates through reports from and discussion with clinical personnel and outside 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.

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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.

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 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.

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.

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, 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.

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Emerging Growth Company Status

The Company is an emerging growth company (EGC) as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards.

Recent Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). 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 Accounting Standards Update (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 evaluating the effect this standard will have on its financial statements and disclosures.

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 8 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 periods ended September 30, 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 September 30, 2020 and December 31, 2019.

The estimated fair value of the term loan was $4.8 million as of September 30, 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. 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 the warrant was recorded to equity and as a debt discount, which is being amortized to interest expense using the effective interest method over the term of the Term Loan. See Note 11 to these condensed financial statements for additional details.

The Company 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 $31 thousand as of September 30, 2020.

The Term Loan and unamortized discount and debt issuance costs balances as of September 30, 2020 are shown below (in thousands):

 

 

 

September 30,

2020

 

Total Term Loan debt

 

$

4,500

 

Less: unamortized discount and debt issuance costs

 

 

(31

)

Total Term Loan, net

 

 

4,469

 

Less: Term Loan, current portion

 

 

(1,908

)

Term loan, net of current portion

 

$

2,561

 

 

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.

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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 September 30, 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 September 30, 2020, future principal payments per year under the Term Loan were as follows (in thousands):

 

Remainder of 2020

 

$

 

2021

 

 

2,571

 

2022

 

 

1,929

 

Total

 

$

4,500

 

 

The Company made interest payments on the Term Loan of $49 thousand and $0.1 million during the three and nine months ended September 30, 2020, respectively.

5. Capital Structure

Common Stock

As of September 30, 2020 and December 31, 2019, the Company was authorized to issue 130,518,922 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 September 30, 2020, no dividends were declared.

Shares reserved for future issuance

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

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Series A redeemable convertible preferred stock

 

 

4,280,690

 

 

 

4,280,690

 

Series B redeemable convertible preferred stock

 

 

11,211,329

 

 

 

 

Stock options outstanding

 

 

2,402,539

 

 

 

859,322

 

Common stock warrant

 

 

49,609

 

 

 

49,609

 

Total shares reserved

 

 

17,944,167

 

 

 

5,189,621

 

 

Redeemable Convertible Preferred Stock

Issued and outstanding redeemable convertible preferred stock as of September 30, 2020, and its principal terms during the year then ended were as follows (in thousands, except share and per share amounts):

 

 

 

 

 

 

 

As of September 30, 2020

 

Series

 

Shares

Authorized

 

 

Shares

Issued and

Outstanding

 

 

Original

Issue Price

Per Share

 

 

Aggregate

Liquidation

Amount

 

 

Net

Carrying

Value

 

Series A redeemable convertible preferred stock

 

 

28,000,000

 

 

 

28,000,000

 

 

$

1.0000

 

 

$

28,000

 

 

$

27,813

 

Series B redeemable convertible preferred stock

 

 

73,333,330

 

 

 

73,333,330

 

 

$

1.2000

 

 

 

88,000

 

 

 

87,633

 

Total

 

 

101,333,330

 

 

 

101,333,330

 

 

 

 

 

 

$

116,000

 

 

$

115,446

 

 

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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):

 

 

 

 

 

 

 

As of December 31, 2019

 

Series

 

Shares

Authorized

 

 

Shares

Issued and

Outstanding

 

 

Original

Issue Price

Per Share

 

 

Aggregate

Liquidation

Amount

 

 

Net

Carrying

Value

 

Series A redeemable convertible preferred stock

 

 

28,000,000

 

 

 

28,000,000

 

 

$

1.0000

 

 

$

28,000

 

 

$

27,813

 

 

6. Equity Incentive Plan and Stock-Based Compensation Expense

Equity Incentive Plan

In October 2020, the Company adopted the 2020 Equity Incentive Plan (the 2020 Plan), which is a successor to and continuation of the Company’s Amended and Restated 2016 Equity Incentive Plan (the 2016 Plan). Total shares reserved under the 2020 Plan was 2,647,684, inclusive of the shares that remained available for issuance under the 2016 Plan at the time the 2020 Plan became effective. 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. See Note 11 to these condensed financial statements for additional details.

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 September 30, 2020.

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

 

 

 

Outstanding

Stock

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life (Years)

 

 

Aggregate

Intrinsic

Value

 

Balance as of December 31, 2019

 

 

859,322

 

 

$

1.20

 

 

 

7.9

 

 

$

209

 

Granted

 

 

1,765,200

 

 

 

3.18

 

 

 

 

 

 

 

Exercised

 

 

(57,614

)

 

 

0.89

 

 

 

 

 

 

 

Forfeited/Cancelled

 

 

(164,369

)

 

 

1.59

 

 

 

 

 

 

 

Balance as of September 30, 2020

 

 

2,402,539

 

 

$

2.64

 

 

 

9.0