Keros Therapeutics, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under 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. Disclosure controls and procedures include, without limitation, controls and procedures 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 accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 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, 2021. Based on the evaluation of our disclosure controls and procedures as of December 31, 2021, 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 Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; • Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 framework) (COSO). Based on its assessment, management concludes that, as of December 31, 2021, our internal control over financial reporting is effective based on those criteria. This Annual Report on Form 10-K does not include an attestation report of our independent registered accounting firm regarding internal control over financial reporting due to a transition period established by rules of the SEC for an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the fiscal quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that certain of our employees are continuing their work outside of our office due to the COVID-19 pandemic. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize any potential impact on the design and operating effectiveness of such controls. 102 Inherent Limitations on Effectiveness of Controls Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. PART III We will file a definitive Proxy Statement for our 2022 Annual Meeting of Stockholders, or our 2022 Proxy Statement, with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2022 Proxy Statement that specifically address the items set forth herein are incorporated by reference. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE The information required by this Item 10 will be included in our 2022 Proxy Statement and is incorporated herein by reference. We have adopted a written Code of Business Conduct and Ethics, or the Code of Conduct, applicable to all of our employees, executive officers and directors, including our principal executive officer, principal financial officer and principal accounting officer. A current copy of the Code of Conduct is available on the Investors section of our website, www.kerostx.com, under "Corporate Governance." We intend to disclose on our website any amendments to, or waivers from, our Code of Conduct that are required to be disclosed pursuant to SEC rules. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 will be included in our 2022 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 will be included in our 2022 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE The information required by this Item 13 will be included in our 2022 Proxy Statement and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 will be included in our 2022 Proxy Statement and is incorporated herein by reference. 103 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this Annual Report on Form 10-K: (1) The Consolidated Financial Statements required to be filed by Item 8 of this Annual Report on Form 10-K, and filed in this Item 15, are as follows: PAGE Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) F-2 Consolidated Balance Sheets F- 2 Consolidated Statements of Operations F- 3 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) F- 4 Consolidated Statements of Cash Flows F- 5 Notes to Consolidated Financial Statements F- 7 (2) The Consolidated Financial Statement Schedule have been omitted because they are either not applicable or the required information is included in the Consolidated Financial Statements or notes thereto listed in (a)(1) above. (3) Exhibits are incorporated herein by reference or are filed with this Annual Report on Form 10-K as indicated below (b) Exhibits EXHIBIT NO. DESCRIPTION FORM FILE NO. EXHIBIT FILING DATE 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 8-K 001-39264 3.1 April 13, 2020 3.2 Amended and Restated Bylaws of the Registrant. 8-K 001-39264 3.2 April 13, 2020 4.1 Amended and Restated Investors’ Rights Agreement by and among the registrant and certain of its stockholders, dated as of March 2, 2020. S-1 333-237212 4.1 March 16, 2020 4.2 Form of Common Stock Certificate. S-1/A 333-237212 4.2 April 1, 2020 4.3* Description of the Registrant’s Securities. 10.1 Form of Indemnity Agreement between the registrant and its directors and officers. S-1/A 333-237212 10.1 April 1, 2020 10.2+ 2017 Stock Incentive Plan, as amended. S-1 333-237212 10.2 March 16, 2020 10.3+ Form of Stock Option Grant Notice and Option Agreement for the 2017 Stock Incentive Plan, as amended. S-1 333-237212 10.3 March 16, 2020 10.4+ 2020 Equity Incentive Plan. S-1/A 333-237212 10.4 April 1, 2020 10.5+ Forms of Stock Option Grant Notice, Option Agreement, Notice of Exercise, Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement for the 2020 Equity Incentive Plan. S-1/A 333-237212 10.5 April 1, 2020 10.6+ 2020 Employee Stock Purchase Plan. S-1/A 333-237212 10.6 April 1, 2020 10.7+ Offer Letter Agreement by and between the registrant and Jasbir Seehra, dated as of December 14, 2015. S-1 333-237212 10.7 March 16, 2020 10.8+ Offer Letter Agreement by and between the registrant and Jenn Lachey, dated as of April 20, 2016. S-1 333-237212 10.8 March 16, 2020 104 10.9# Exclusive Patent License Agreement by and between the registrant and The General Hospital Corporation, d/b/a Massachusetts General Hospital, or MGH, dated as of April 5, 2016, as amended by Amendment #1 by and between the registrant and The Brigham and Women’s Hospital, Inc. on May 12, 2017 and by Amendment #2 by and between the registrant and MGH on February 23, 2018. S-1 333-237212 10.10 March 16, 2020 10.10*# License Agreement by and between the registrant and Hansoh (Shanghai) Healthtech Co., Ltd., dated as of December 12, 2021, as amended by Amendment No. 1 by and between the registrant and Hansoh (Shanghai) Healthtech Co., Ltd., dated as of February 10, 2022. 10.11 Lease Agreement by and between the registrant and 128 Spring Street Lexington, LLC, dated March 20, 2017, as amended by the First Amendment to Lease Agreement by and between the registrant and 128 Spring Street Lexington, LLC, dated July 1, 2019 and by the Second Amendment to Lease Agreement by and between the registrant and 128 Spring Street Lexington, LLC, dated August 8, 2019. S-1 333-237212 10.12 March 16, 2020 10.12 Third Amendment to Lease Agreement by and between the registrant and 99 Hayden LLC, dated August 4, 2021. 10-Q 001-39264 10.3 August 5, 2021 10.13+ Offer Letter Agreement by and between the registrant and Keith Regnante, dated as of February 7, 2020. S-1 333-237212 10.13 March 16, 2020 10.14+ Employment Agreement by and between the registrant and Jasbir Seehra, dated as of March 31, 2020, effective as of April 13, 2020. S-1/A 333-237212 10.14 April 1, 2020 10.15+ Employment Agreement by and between the registrant and Jenn Lachey, dated as of March 31, 2020, effective as of April 13, 2020. S-1/A 333-237212 10.15 April 1, 2020 10.16+ Employment Agreement by and between the registrant and Keith Regnante, dated as of March 31, 2020, effective as of April 13, 2020. S-1/A 333-237212 10.17 April 1, 2020 10.17+ Separation and Release Agreement by and between the registrant and Claudia Ordonez, dated and effective as of July 30, 2021. 8-K 001-39264 10.1 August 2, 2021 10.18+ Employment Agreement by and between the registrant and Simon Cooper, dated as of July 30, 2021 effective as of August 2, 2021. 8-K 001-39264 10.2 August 2, 2021 10.19+ Employment Agreement by and between the registrant and Christopher Rovaldi, dated as of January 28, 2022 effective as of February 1, 2022. 8-K 001-39264 10.1 January 31, 2022 10.20*+ First Amendment to the Employment Agreement by and between the registrant and Jenn Lachey, dated as of January 1, 2022. 10.21*+ First Amendment to the Employment Agreement by and between the registrant and Keith Regnante, dated as of January 1, 2022. 10.22*+ First Amendment to the Employment Agreement by and between the registrant and Simon Cooper, dated as of January 1, 2022. 10.23 Indenture of Lease by and between the registrant and Revolution Labs Owner, LLC, dated September 7, 2021. 10-Q 001-39264 10.1 November 4, 2021 21.1* Subsidiaries of Keros Therapeutics, Inc. 23.1* Consent of Independent Registered Public Accounting Firm. 105 31.1* Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 104* Cover Page Interactive Data File - the cover page interactive data is embedded within the Inline XBRL document or included within the Exhibit 101 attachments * Filed herewith ** Furnished herewith + Indicates management contract or compensatory plan. # Certain portions of this exhibit (indicated by asterisks) have been omitted because they are not material and would likely cause competitive harm to Keros Therapeutics, Inc. if publicly disclosed. ITEM 16. FORM 10-K SUMMARY Not applicable. 106 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Keros Therapeutics, Inc. Date: March 9, 2022 By: /s/ Jasbir Seehra Jasbir Seehra, Ph.D. Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY AND SIGNATURES KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jasbir Seehra, Ph.D. and Keith Regnante, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and either of them, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE /s/ Jasbir Seehra Chief Executive Officer and Director (Principal Executive Officer) March 9, 2022 Jasbir Seehra, Ph.D. /s/ Keith Regnante Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 9, 2022 Keith Regnante /s/ Nima Farzan Director March 9, 2022 Nima Farzan /s/ Carl Gordon Director March 9, 2022 Carl Gordon, Ph.D., C.F.A. /s/ Mary Ann Gray Director March 9, 2022 Mary Ann Gray, Ph.D. /s/ Tomer Kariv Director March 9, 2022 Tomer Kariv /s/ Julius Knowles Director March 9, 2022 Julius Knowles /s/ Ran Nussbaum Director March 9, 2022 Ran Nussbaum INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE Report of Independent Registered Public Accounting Firm (PCAOB ID 34 )) F-2 Consolidated Balance Sheets F- 2 Consolidated Statements of Operations F- 3 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) F- 4 Consolidated Statements of Cash Flows F- 5 Notes to Consolidated Financial Statements F- 7 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Keros Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Keros Therapeutics, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows, for each of the two years in the period ended December 31, 2021, 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 as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Deloitte & Touche LLP Boston, Massachusetts March 9, 2022 We have served as the Company's auditor since 2019. F-1 KEROS THERAPEUTICS, INC. Consolidated Balance Sheets (In thousands, except share and per share data) DECEMBER 31, 2021 2020 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 230,042 $ 265,876 Accounts receivable 18,000 — Prepaid expenses and other current assets 3,398 1,850 Total current assets 251,440 267,726 Operating lease right-of-use assets 1,067 878 Property and equipment, net 1,335 724 Restricted cash 1,327 115 Other long term assets 82 — TOTAL ASSETS $ 255,251 $ 269,443 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 3,645 $ 2,149 Current portion of operating lease liabilities 862 423 Accrued expenses and other current liabilities 7,339 4,612 Total current liabilities 11,846 7,184 Operating lease liabilities, net of current portion 231 476 Other liabilities — 62 Total liabilities 12,077 7,722 COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS’ EQUITY: Common stock, par value of $ 0.0001 per share; 200,000,000 and 200,000,000 shares authorized as of December 31, 2021 and December 31, 2020, respectively; 23,974,834 and 23,192,866 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 2 2 Additional paid-in capital 366,927 326,730 Accumulated deficit ( 123,755 ) ( 65,011 ) Total stockholders’ equity 243,174 261,721 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 255,251 $ 269,443 See notes to consolidated financial statements. F-2 KEROS THERAPEUTICS, INC. Consolidated Statements of Operations (In thousands, except share and per share data) YEAR ENDED DECEMBER 31, 2021 2020 REVENUE: Research collaboration revenue $ 20,100 $ — Total revenue 20,100 — OPERATING EXPENSES: Research and development ( 55,143 ) ( 33,860 ) General and administrative ( 21,330 ) ( 12,797 ) Total operating expenses ( 76,473 ) ( 46,657 ) LOSS FROM OPERATIONS ( 56,373 ) ( 46,657 ) OTHER INCOME (EXPENSE), NET: Interest expense, net ( 4 ) ( 6 ) Research and development incentive income — 2,460 Change in fair value of preferred stock tranche obligation — ( 1,490 ) Other income (expense), net ( 356 ) 160 Total other income (expense), net ( 360 ) 1,124 Loss before income taxes ( 56,733 ) ( 45,533 ) Income tax (provision) benefit ( 2,011 ) 172 Net loss $ ( 58,744 ) $ ( 45,361 ) Net loss attributable to common stockholders—basic and diluted $ ( 58,744 ) $ ( 45,361 ) Net loss per share attributable to common stockholders—basic and diluted $ ( 2.52 ) $ ( 2.93 ) Weighted-average common stock outstanding—basic and diluted 23,333,914 15,506,397 See notes to consolidated financial statements. F-3 KEROS THERAPEUTICS, INC. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (In thousands, except share and per share data) CONVERTIBLE PREFERRED STOCK COMMON STOCK $ 0.0001 PAR VALUE ADDITIONAL PAID-IN CAPITAL ACCUMULATED DEFICIT TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) $ 0.0001 PAR VALUE SERIES A $ 0.0001 PAR VALUE SERIES A-1 $ 0.0001 PAR VALUE SERIES B-1 $ 0.0001 PAR VALUE SERIES C SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT BALANCE, January 1, 2020 4,607,652 $ 9,891 368,612 $ 944 1,579,043 $ 9,106 — $ — 2,429,705 $ 1 $ 203 $ ( 19,650 ) $ ( 19,446 ) Issuance of Series C convertible preferred stock, net of issuance costs of $ 227 — — — — — — 4,169,822 55,781 ( 8 ) ( 8 ) Settlement of preferred stock tranche liability — — — — — — — — 6,446 6,446 Conversion of convertible preferred stock upon initial public offering ( 4,607,652 ) ( 9,891 ) ( 368,612 ) ( 944 ) ( 1,579,043 ) ( 9,106 ) ( 4,169,822 ) ( 55,781 ) 10,725,129 1 75,721 75,722 Initial public offering, net of underwriting discounts, commissions and offering costs — — — — — — — — 6,900,000 — 100,123 100,123 Issuance of common stock, net of underwriting discounts, commissions and offering costs of $ 9,390 — — — — — — — — 2,990,000 140,110 140,110 Exercise of common stock options — — — — — — — — 113,475 — 38 — 38 Vesting of restricted stock — — — — — — — — 34,557 — — — — Stock-based compensation — — — — — — — — — — 4,097 — 4,097 Net loss — — — — — — — — — — — ( 45,361 ) ( 45,361 ) BALANCE, December 31, 2020 — $ — — $ — — $ — — $ — 23,192,866 $ 2 $ 326,730 $ ( 65,011 ) $ 261,721 Issuance of common stock under the ATM agreement, net of commissions and offering cost of $ 475 — — — — — — — — 520,000 — 28,096 — 28,096 Exercise of common stock options — — — — — — — — 261,968 — 379 — 379 Stock-based compensation — — — — — — — — — — 11,722 — 11,722 Net loss — — — — — — — — — — — ( 58,744 ) ( 58,744 ) BALANCE, December 31, 2021 — $ — — $ — — $ — — $ — 23,974,834 $ 2 $ 366,927 $ ( 123,755 ) $ 243,174 See notes to consolidated financial statements. F-4 KEROS THERAPEUTICS, INC. Consolidated Statements of Cash Flows (In thousands) YEAR ENDED DECEMBER 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 58,744 ) $ ( 45,361 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 378 278 Loss on disposal of fixed asset 46 — Stock-based compensation expense 11,722 4,097 Non-cash lease expense 520 327 Changes in fair value of preferred stock tranche obligation — 1,490 Changes in operating assets and liabilities: Accounts receivable ( 18,000 ) — Research and development incentive receivable — 922 Prepaid expenses and other current assets ( 1,548 ) ( 1,469 ) Deferred IPO costs — 604 Accounts payable 1,485 61 Right-of-use assets and operating lease liabilities ( 597 ) ( 376 ) Accrued expenses and other current liabilities 2,652 2,590 Other liabilities ( 62 ) ( 57 ) Net cash used in operating activities ( 62,148 ) ( 36,894 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 1,024 ) ( 294 ) Net cash used in investing activities ( 1,024 ) ( 294 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of offering cost 28,171 — Proceeds from issuance of Series C preferred stock — 56,000 Payment of Series C preferred stock issuance costs — ( 227 ) Proceeds from issuance of common stock, from the initial public offering, net of underwriting discounts of $ 7,728 — 102,672 Payment of initial public offering costs — ( 2,549 ) Proceeds from issuance of common stock, from follow-on financing, net of underwriting discounts of $ 8,970 — 140,530 Payment of follow-on financing offering costs — ( 420 ) Proceeds from exercise of stock options 379 38 Net cash provided by financing activities 28,550 296,044 NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH ( 34,622 ) 258,856 Cash, cash equivalents and restricted cash at beginning of year 265,991 7,135 Cash, cash equivalents and restricted cash at end of year $ 231,369 $ 265,991 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Settlement of preferred stock tranche obligation $ — $ 6,446 Property and equipment purchases still in accounts payable $ 11 $ — Issuance cost still in accrued and accounts payable $ 75 $ — Conversion of preferred stock into common stock upon closing of initial public offering $ — $ 75,714 The following table provides a reconciliation of the cash and cash equivalents and restricted cash as of each of the periods shown above: F-5 YEAR ENDED DECEMBER 31, 2021 2020 Cash and cash equivalents $ 230,042 $ 265,876 Restricted cash 1,327 115 Total cash, cash equivalents and restricted cash $ 231,369 $ 265,991 See notes to consolidated financial statements. F-6 KEROS THERAPEUTICS, INC. Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION Keros Therapeutics, Inc. (“Keros” or the “Company”) was incorporated in 2015 as a Delaware corporation. Its principal offices are in Lexington, Massachusetts. The Company is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel treatments for patients suffering from hematological and musculoskeletal disorders with high unmet medical need. The Company’s lead protein therapeutic product candidate, KER-050, is an engineered ligand trap comprised of a modified ligand-binding domain of the transforming growth factor-beta (“TGF-ß”) receptor known as activin receptor type IIA that is fused to the portion of the human antibody known as the Fc domain. KER-050 is being developed for the treatment of low blood cell counts (“cytopenias”), including anemia and thrombocytopenia, in patients with myelodysplastic syndromes (“MDS”) and in patients with myelofibrosis. The Company has initiated a Phase 2 clinical trial in patients with MDS and reported preliminary data from Part 1 of this trial most recently in December 2021. The Company’s lead small molecule product candidate, KER-047, is designed to selectively and potently inhibit activin receptor-like kinase-2 (“ALK2”), a TGF-ß receptor. KER-047 is being developed for the treatment of anemia resulting from iron imbalance as a direct consequence of elevated ALK2 signaling, including the Company’s initial target, iron-refractory iron deficiency anemia (“IRIDA”). In December 2020, the Company reported topline data from its completed Phase 1 clinical trial of KER-047 in healthy volunteers. The Company’s third product candidate, KER-012, is designed to bind to and inhibit the signaling of TGF-ß ligands that suppress bone growth, including activin A and activin B, to potentially promote bone growth. KER-012 is being developed for the treatment of pulmonary arterial hypertension (“PAH”) and for the treatment of disorders associated with bone loss, such as osteoporosis and osteogenesis imperfecta. In September 2021, the Company commenced a Phase 1 clinical trial of KER-012 in healthy volunteers. Since its inception in 2015, the Company has devoted the majority of its resources to business planning, research and development of its product candidates, including conducting clinical trials and preclinical studies, raising capital and recruiting management and technical staff to support these operations. To date, the Company has not generated any revenue from product sales as none of its product candidates have been approved for commercialization. In May 2021, the Company filed a registration statement on Form S-3, which was automatically effective upon filing. Pursuant to this registration statement, the Company may issue up to $ 150.0 million in common stock in sales deemed to be an “at the market offering,” as defined by the Securities Act, and, so long as the Company qualifies as a “well-known seasoned issuer” as defined in Rule 405 of the Securities Act, an unspecified amount of shares of the Company common stock, preferred stock, debt securities and warrants. Liquidity and Capital Resources The Company’s consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for the next 12 months. Management believes that the Company’s existing $ 230.0 million in cash and cash equivalents, will allow the Company to continue its operations for at least the next 12 months. In the absence of a significant source of recurring revenue, the continued viability of the Company beyond that point is dependent on its ability to continue to raise additional capital to finance its operations. If the Company is unable to obtain additional funding, the Company may be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations. The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned subsidiaries, Keros Therapeutics Australia Pty Ltd (“Keros Australia”) and Keros Security Corporation, a Massachusetts securities corporation . 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, Keros Australia and Keros Security Corporation. All intercompany accounts and transactions have been eliminated in consolidation. 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, revenue, and expenses, and the disclosure of contingent F-7 assets and liabilities as of and during the reporting period. The Company bases its estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. This process may result in actual results differing materially from those estimated amounts used in the preparation of the financial statements if these results differ from historical experience, or other assumptions do not turn out to be substantially accurate, even if such assumptions are reasonable when made. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, useful lives assigned to property and equipment, the fair values of common and preferred stock and the fair value of the preferred stock tranche obligation. The Company assesses estimates on an ongoing basis; however, actual results could materially differ from those estimates. Fair Value Measurements Certain assets and liabilities are reported on a recurring basis at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. An entity may choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company had no financial instruments measured at level 3 as of December 31, 2021. Cash, Cash Equivalents, and Restricted Cash Cash and cash equivalents consist of standard checking accounts and money market funds. The Company considers all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. The Company’s cash equivalents, which are funds held in a money market account, are measured at fair value on a recurring basis. The carrying amount of cash equivalents was $ 230.0 million and $ 262.0 million as of December 31, 2021 and 2020, respectively, which approximates fair value and was determined based upon Level 1 inputs. The money market account is valued using quoted market prices with no valuation adjustments applied and is categorized as Level 1. The Company had restricted cash of $ 1.3 million and $ 0.1 million in the form of a certificate of deposit related to its operating leases in Lexington, Massachusetts as of December 31, 2021 and 2020, respectively. Concentrations of Credit Risk Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents. The Company may maintain deposits in financial institutions in excess of government insured limits. The Company believes that it is not exposed to significant credit risk as its deposits are held at financial institutions that management believes to be of high credit quality and the Company has not experienced any losses on these deposits. As of December 31, 2021 and 2020, the Company’s cash and cash equivalents were held with three financial institutions. The Company believes that the market risk arising from its holdings of these financial instruments is mitigated based on the fact that many of these securities are either government-backed or of high credit rating. Property and Equipment Property and equipment are recorded at cost. Expenditures for repairs and maintenance are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation are derecognized from the accounts, and F-8 any resulting gain or loss is included in the determination of net loss. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as follows: ESTIMATED USEFUL LIFE Computer equipment and software 3 years Laboratory equipment 5 years Office furniture 5 years Leasehold improvements lesser of useful life or remaining lease term Impairment of Long-Lived Assets The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. To date, no impairments have been recognized for these assets. Leases The Company accounts for its leases under Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”). At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than 12 months are recognized on the balance sheet as ROU assets and current and non-current lease liabilities, as applicable. The Company has elected not to recognize on the balance sheet leases with terms of 12 months or less. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew. The Company monitors its material leases on a quarterly basis. Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of future lease payments over the expected remaining lease term. Lease cost for operating leases is recognized on a straight-line basis over the lease term as an operating expense. Certain adjustments to the ROU asset may be required for items such as lease prepayments or incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. In transition to ASC 842, the Company utilized the remaining lease term of its lease in determining the appropriate incremental borrowing rate. For all asset classes of its leases, the Company has elected to account for the lease and non-lease components together for existing classes of underlying assets. Guarantees and Indemnifications As permitted under Delaware law, the Company indemnifies its officers, directors, consultants and employees for certain events or occurrences that happen by reason of the relationship with, or position held at, the Company. Through December 31, 2021, the Company had not experienced any losses related to these indemnification obligations, and no claims were outstanding. The Company does not expect significant claims related to these indemnification obligations and, consequently, concluded that the fair value of these obligations is negligible, and no related liabilities have been established. Research and Development Costs Research and development costs are charged to expense as incurred. Research and development costs consist of expenses incurred in performing research and development activities, including salaries and benefits, materials and supplies, preclinical expenses, stock-based compensation expense, depreciation of equipment, contract services, facilities, and other outside expenses. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its vendors. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the consolidated financial statements as prepaid expense or accrued research and development expense. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed. F-9 Research and Development Incentive The Australian research and development tax incentive program provides tax offsets to eligible companies that engage in research and development activities and has two core components: ▪ 43.5% refundable tax offset for certain eligible research and development entities with an aggregated turnover of less than $20.0 million per annum; and ▪ 38.5% non-refundable tax offset for all other eligible research and development entities. Unused offset amounts may be able to be carried forward for use in future income years. The Company is eligible to participate in an Australian research and development tax incentive program under which the Company is eligible to receive a cash refund from the Australian Taxation Office for a percentage of the research and development costs expended by the Company in Australia. The Company’s estimate of the cash refund it expects to receive related to the Australian research and development tax incentive program is included in other assets in the accompanying consolidated balance sheet and such amounts are recorded as research and development incentive income in the statement of operations. The Company recognizes research and development incentive income when there is reasonable assurance that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured. The Company has no research and development incentive receivable and other income from Australian research and development incentives of $ 0.0 million and $ 2.5 million for the years ended December 31, 2021 and 2020, respectively, related to refundable research and development incentive income payments in Australia. Revenue Recognition To date, the Company has earned revenue under the license agreement with Novo Nordisk A/S, which was terminated in October 2020, the license agreement with Neurona Therapeutics, Inc. (“Neurona”) (see Note 13) and the license agreement with Hansoh (Shanghai) Healthtech Co., Ltd. (“Hansoh”) (see Note 13). The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The Company enters into certain agreements that are within the scope of ASC 606, under which the Company licenses, may license or grants an option to license rights to certain of the Company’s product candidates and performs research and development services in connection with such arrangements. The terms of these arrangements typically include payment of one or more of the following: non-refundable, upfront fees; reimbursement of research and development costs; development, clinical, regulatory and commercial sales milestone payments, and royalties on net sales of licensed products. Under ASC 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine the appropriate amount of revenue to be recognized for arrangements determined to be within the scope of ASC 606, the Company performs the following five steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect consideration it is entitled to in exchange for the goods or services it transfers to the customer. The promised goods or services in the Company’s arrangements typically consist of a license, or option to license, rights to the Company’s intellectual property or research and development services. The Company provides options to additional items in such arrangements, which are accounted for as separate contracts when the customer elects to exercise such options, unless the option provides a material right to the customer. Performance obligations are promised goods or services in a contract to transfer a distinct good or service to the customer and are considered distinct when (i) the customer can benefit from the good or service on its own or together with other readily available resources and (ii) the promised good or service is separately identifiable from other promises in the contract. In assessing whether promised goods or services are distinct, the Company considers factors such as the stage of development of the underlying intellectual property, the capabilities of the customer to develop the intellectual property on its own or whether the required expertise is readily available and whether the goods or services are integral or dependent to other goods or services in the contract. The Company estimates the transaction price based on the amount expected to be received for transferring the promised goods or services in the contract. The consideration may include fixed consideration and variable consideration. At the inception of each arrangement that includes variable consideration, the Company evaluates the amount of potential payment and the likelihood that the payments will be received. The Company utilizes either the most likely amount method or expected value method to estimate the amount expected to be received based on which method best predicts the amount expected to be received. The amount of variable consideration that is included in the transaction price may be constrained and is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. F-10 The Company’s contracts often include development and regulatory milestone payments that are assessed under the most likely amount method and constrained if it is probable that a significant revenue reversal would occur. Milestone payments that are not within the Company’s control or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of such development and clinical milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration and other research and development revenue in the period of adjustment. For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of the Company’s collaboration or strategic alliance arrangements. The Company allocates the transaction price based on the estimated standalone selling price. The Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company utilizes key assumptions to determine the stand-alone selling price, which may include other comparable transactions, pricing considered in negotiating the transaction and the estimated costs. Variable consideration is allocated specifically to one or more performance obligations in a contract when the terms of the variable consideration relate to the satisfaction of the performance obligation and the resulting amounts allocated are consistent with the amounts the Company would expect to receive for the satisfaction of each performance obligation. The consideration allocated to each performance obligation is recognized as revenue when control is transferred for the related goods or services. For performance obligations which consist of licenses and other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition. The Company receives payments from its customers based on billing schedules established in each contract. Upfront payments and fees are recorded as deferred revenue upon receipt or when due until the Company performs its obligations under these arrangements. Amounts are recorded as accounts receivable when the Company’s right to consideration is unconditional. Foreign Currency Transactions The functional currency for the Company’s wholly owned foreign subsidiary, Keros Australia, is the United States dollar. All foreign currency transaction gains and losses are recognized in the consolidated statement of operations. Segment Information Operating segments are identified as components of an enterprise about which separate discrete financial information is made available for evaluation by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. The CODM is the Company’s chief executive officer. The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s singular concentration is focused on the discovery and development of breakthrough therapeutics for hematological and musculoskeletal disorders with high unmet medical need. Common Stock Valuation Prior to the Company’s initial public offering (“IPO”) in April 2020, due to the absence of an active market for the Company’s common stock, the Company utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid ( Valuation of Privately-Held Company Equity Securities Issued as Compensation ) to estimate the fair value of its common stock. Prior to the IPO, the fair value of the shares of common stock underlying the stock-based awards were determined by the Company's board of directors (the "Board") with input from management. Since there was no public market for the common stock prior to April 8, 2020, the Board had determined the fair value of the common stock at the time of grant of the stock-based award by considering a number of objective and subjective factors, including having valuations of the common stock performed by a third-party valuation specialist. Following the closing of the initial public offering, the fair value of the Company’s common stock is determined based on the quoted market price of the common stock. Convertible Preferred Stock The Company has classified convertible preferred stock, referred to as preferred stock, as temporary equity in the accompanying consolidated balance sheet due to terms that allow for redemption of the shares in cash upon certain change in control events that are outside of the Company’s control, including sale or transfer of control of the Company as holders of the preferred stock could cause redemption of the shares in these situations. Subsequent adjustments of the carrying values to the ultimate redemption values will be made only when it becomes probable that such a liquidation event will occur. F-11 On April 13, 2020, upon the closing of the Company's IPO, all outstanding shares of Preferred Stock converted into 10,725,129 shares of the Company's common stock. Additionally, effective April 13, 2020, the Company's amended and restated certificate of incorporation authorized the issuance of 10,000,000 shares of preferred stock. There were no outstanding shares of convertible preferred stock as of December 31, 2021. Stock-Based Compensation The Company accounts for all stock-based payment awards granted to employees and non-employees as stock-based compensation expense at fair value. The Company’s stock-based payments include stock options and grants of common stock, including common stock subject to vesting. The measurement date for employee awards is the date of grant, and stock-based compensation costs are recognized as expense over the employees’ requisite service period, which is the vesting period, on a straight-line basis. Stock-based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. Stock-based compensation expense is classified in the accompanying consolidated statement of operations based on the function to which the related services are provided. The Company recognizes stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future. Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements and tax returns. Deferred tax assets and liabilities are determined based upon the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and for loss and credit carryforwards, using enacted tax rates expected to be in effect in the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that these assets may not be realized. The Company determines whether it is more likely than not that a tax position will be sustained upon examination. If it is not more likely than not that a position will be sustained, none of the benefit attributable to the position is recognized. The tax benefit to be recognized for any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the contingency. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes. Comprehensive Loss Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is equal to net loss for all periods presented. Net Loss Per Share Basic net loss per share and diluted net loss per share are computed using the weighted-average number of shares of common stock outstanding for the period. Net loss per share attributable to common stockholders is calculated using the two-class method, which is an earnings allocation formula that determines net loss per share for the holders of shares of the Company’s common stock and participating securities. The Company’s preferred stock contains participation rights in any dividend paid by the Company and is deemed to be a participating security. The participating securities do not include a contractual obligation to share in losses of the Company and are not included in the calculation of net loss per share in the periods in which a net loss is recorded. Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted method. The Company allocates earnings first to preferred stockholders based on dividend rights and then to common and preferred stockholders based on ownership interests. The weighted-average number of shares of common stock included in the computation of diluted net loss gives effect to all potentially dilutive common stock equivalent shares, including outstanding stock options and preferred stock. The Company’s potentially dilutive securities, which include stock options, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders F-12 is the same. The Company excluded the following from the computation of diluted net loss per share attributable to common stockholders as of December 31, 2021 and 2020, because including them would have had an anti-dilutive effect: DECEMBER 31, 2021 2020 Options to purchase common stock 2,810,684 2,499,603 2,810,684 2,499,603 Recently Adopted Accounting Pronouncements On January 1, 2021, the Company adopted Financial Accounting Standards Board Accounting Standards Update No. 2019-12, Income Taxes Simplifying the Accounting for Income Taxes ("ASU No. 2019-12"). ASU No. 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU No. 2019-12 also simplifies aspects of the accounting for franchise taxes, enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of this standard did not have an impact on the Company’s consolidated financial statements and related disclosures. Risks and Uncertainties As a result of the continuing global COVID-19 pandemic, the Company has implemented business continuity plans designed to address and mitigate the impact of the COVID-19 pandemic on its employees and its business operations, including its preclinical studies and clinical trials, supply chains and third-party providers. Additionally, in response to ongoing COVID-19 pandemic, the Company closed its principal executive office in March 2020. Currently, the Company’s administrative employees continue to work outside of the principal executive office, and the Company maintains a limited the number of staff in any given research laboratory. The Company anticipates that the COVID-19 pandemic will continue to have an impact on the development timelines for several of its preclinical and clinical programs. The extent to which the COVID-19 pandemic impacts the Company’s business, its clinical development, its regulatory efforts, its corporate development objectives and the value of and market for its common stock will depend on future developments which are highly uncertain and cannot be predicted with confidence at this time, including, without limitation: the ultimate duration of the pandemic; travel restrictions; home quarantine orders; social distancing and business closure requirements in the United States, Australia, New Zealand and other countries; and the effectiveness of actions taken globally to mitigate the spread of the COVID-19 virus. The overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements. In addition, the Company is subject to other challenges and risks specific to its business and its ability to execute on its business plan and strategy, as well as risks and uncertainties common to companies in the biopharmaceutical industry with research and development operations, including, without limitation, risks and uncertainties associated with: obtaining regulatory approval of its product candidates; delays or problems in obtaining clinical supply, loss of single source suppliers or failure to comply with manufacturing regulations; product development and the inherent uncertainty of clinical success; the challenges of protecting and enhancing its intellectual property rights; the challenges of complying with applicable regulatory requirements; and identifying, acquiring or in-licensing additional products or product candidates. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above. F-13 3. FAIR VALUE MEASUREMENTS The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such fair values (in thousands): DESCRIPTION DECEMBER 31, 2021 QUOTED PRICES ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 3) Asset Money market funds $ 230,042 $ 230,042 $ — $ — Total financial assets $ 230,042 $ 230,042 $ — $ — DESCRIPTION DECEMBER 31, 2020 QUOTED PRICES ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 3) Asset Money market funds $ 262,043 $ 262,043 $ — $ — Total financial assets $ 262,043 $ 262,043 $ — $ — There have been no transfers between fair value levels during the years ended December 31, 2021 and 2020. The carrying values of other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. Preferred Stock Tranche Obligation The Company determined that its obligation to issue, and the Company’s investors’ obligation to purchase additional shares of convertible preferred stock at a fixed price (i.e. the issuance price) in subsequent tranches following the initial closings of the series A, series A-1, and series B-1 convertible preferred stock (respectively, the “Series A Preferred Stock,” “Series A-1 Preferred Stock,” and “Series B-1 Preferred Stock”, which are referred to collectively with the series B-2 convertible preferred stock (the “Series B-2 Preferred Stock”) and the series C convertible preferred stock (the “Series C Preferred Stock”) as the “Preferred Stock”) financings represented a freestanding financial instrument (the “Preferred Stock Tranche Obligation”). The freestanding financial instrument was classified as a liability on the Company’s consolidated balance sheets and initially recorded at fair value, with changes in fair value for each reporting period recognized in other expense, net in the consolidated statement of operations. The Board determined it was probable that the Series B-2 Preferred Stock milestone would be met, and the stockholders and the Board subsequently waived the milestone and the issuance of the Series B-2 Preferred Stock on March 2, 2020. Instead of issuing the Series B-2 Preferred Stock upon this waiver, the Company instead closed its convertible Series C Preferred Stock financing (“Series C financing”). The associated Preferred Stock Tranche Obligation was remeasured prior to settlement, with the associated $ 1.5 million increase in fair value recorded in the Company’s consolidated statement of operations as other expense, net. As the Series C financing was executed with related parties, the Company recognized the settlement of the Preferred Stock Tranche Obligation of $ 6.4 million as a capital contribution in additional paid-in capital in the Company’s consolidated balance sheets. The following reflects the significant quantitative inputs used in the valuation of the Preferred Stock Tranche Obligation: MARCH 2, 2020 DECEMBER 31, 2019 Stand-alone Series B-1 Preferred Stock price (spot price) $ 7.28 $ 7.28 Estimated future value of Series B-2 Preferred Stock $ 8.14 $ 8.14 Discount rate 15.50 % 15.50 % Time to liquidity (years) 0.00 0.16 Probability of tranche closing 100 % 80 % F-14 The purchase price of the Preferred Stock at initial issuance, and all subsequent issuances was higher than the fair value of the Company’s common stock. The following table sets forth a summary of changes in the fair value of the Company’s Preferred Stock Tranche Obligation for which fair value was determined by Level 3 inputs (in thousands): PREFERRED STOCK TRANCHE OBLIGATION Balance as of January 1, 2019 $ 2,392 Issuance — Change in fair value 2,564 Balance as of December 31, 2019 4,956 Change in fair value 1,490 Settlement of tranche obligation ( 6,446 ) Balance as of December 31, 2020 $ — Fluctuations in the fair value of the Company’s Preferred Stock is the primary cause for the significant changes in fair value of the Preferred Stock Tranche Obligation. In 2020 and 2019, the enterprise value of the Company was determined using the Market Approach, specifically the Subject Company Transaction Method, which considers all share class rights and preferences, as of the date of the most recent financing. As part of the Company’s strategy, during 2019, the Company began considering the pursuit of longer-term liquidity options including a potential initial public offering, which caused an increase in the value of the Series B-1 Preferred Stock while reducing the value of the Preferred Stock Tranche Obligation. Subsequently, in March 2020, the Company determined it was probable that the milestone criteria necessary to close the subsequent tranche would be met; as such, the value of the Preferred Stock Tranche Obligation increased. The Board then waived the milestone in favor of issuing the Series C Preferred Stock in March 2020 (see Note 8), and in doing so, the Preferred Stock Tranche Obligation was fully settled and reduced to $ 0 on the Company's consolidated balance sheet. 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets as of December 31, 2021 and 2020 consisted of the following (in thousands): DECEMBER 31, 2021 2020 Prepaid service contracts 1,613 501 Income tax credit receivable 30 172 Prepaid sales tax 255 188 R&D payroll tax credit 167 44 Prepaid Insurance 993 785 Other 340 160 Total prepaid expenses and other current assets $ 3,398 $ 1,850 5. PROPERTY AND EQUIPMENT, NET Property and equipment, net as of December 31, 2021 and 2020 consisted of the following (in thousands): DECEMBER 31, 2021 2020 Computer equipment and software $ 41 $ 35 Laboratory equipment 1,821 1,106 Office furniture 55 47 Leasehold improvements 264 257 Total 2,181 1,445 Less: accumulated depreciation ( 846 ) ( 721 ) Property and equipment, net $ 1,335 $ 724 Depreciation expense was $ 0.4 million and $ 0.3 million for each of the years ended December 31, 2021 and 2020, respectively. F-15 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities as of December 31, 2021 and 2020 consisted of the following (in thousands): DECEMBER 31, 2021 2020 Accrued external R&D costs $ 861 $ 169 Accrued external manufacturing costs 3,259 2,265 Accrued compensation and benefits 2,373 1,510 Accrued tax 110 185 Accrued legal and consultants 532 265 Other 204 218 Total accrued expenses and other current liabilities $ 7,339 $ 4,612 7. LICENSE AGREEMENTS Massachusetts General Hospital On April 5, 2016, the Company entered into an exclusive patent license agreement with The General Hospital Corporation d/b/a Massachusetts General Hospital (“MGH”). Under the license agreement with MGH (as amended in May 2017 and February 2018, the “MGH Agreement”), the Company obtained an exclusive, worldwide license, with the right to sublicense, under certain patents and technical information of MGH, to make, have made, use, have used, sell, have sold, lease, have leased, import, have imported or otherwise transfer licensed products and processes for use in the treatment, diagnosis, palliation and prevention of diseases and disorders in humans and animals. The Company is required to use commercially reasonable efforts to develop and commercialize licensed products and processes and must achieve certain required diligence milestones. Under the terms of the MGH Agreement, the Company paid an initial license payment of $ 0.1 million in 2016, and reimbursed MGH approximately $ 0.3 million of prior patent prosecution expenses related to the licensed patents in 2017. The Company also issued MGH an aggregate of 358,674 shares of its common stock. Additionally, the Company is required to pay a low-five digit to mid-five digit annual maintenance fee prior to the first commercial sale of its first product or process, a mid-five digit annual maintenance fee after the first commercial sale of its first product or process that is creditable against royalties, certain clinical and regulatory milestone payments for the first three products or indications to achieve such milestones, which milestone payments are $ 8.6 million in the aggregate, and certain commercial milestone payments for the first three products or indications to achieve such milestones, which milestone payments are $ 18.0 million in the aggregate. We made payments of $ 50,000 and $ 300,000 in 2020 and 2021, respectively, for the achievement of the clinical and regulatory milestones of (i) filing of an IND in the first country and (ii) the completion of a Phase 1 clinical trial, respectively. The Company is also obligated to pay tiered royalties on net sales of licensed products ranging in the low-single digits to mid-single digits. The royalty rates are subject to up to a maximum 50 % reduction for lack of a valid claim, in the event that it is necessary for the Company to obtain a license to any third-party intellectual property related to the licensed products, and generic competition. The obligation to pay royalties under the MGH Agreement expires on a licensed product-by-licensed product and country-by-country basis upon the later of expiry of the last valid claim of the licensed patents that cover such licensed product in such country or ten years from the first commercial sale of such product in such country. The Company is also obligated to pay a percentage of non-royalty-related payments received by it from sublicensees ranging in the low-double digits and a change of control fee equal to a low-single digit percentage of the payments received as part of any completed transaction up to a low seven-digit amount. The MGH Agreement expires upon expiry of the last remaining royalty obligation for a licensed product or process. Under the MGH Agreement, MGH may terminate the agreement upon the Company’s uncured material breach or insolvency, a challenge by the Company of the licensed patents and certain other specified breaches of the MGH Agreement. The Company may terminate the agreement for any reason upon specified prior written notice to MGH. Neurona Agreement On June 22, 2021, the Company entered into a license agreement with Neurona. Refer to Note 13, Revenue from Contracts with Customers, for more information regarding this agreement. Hansoh Agreement On December 12, 2021, the Company entered into a license agreement with Hansoh. Refer to Note 13, Revenue from Contracts with Customers, for more information regarding this agreement. 8. CONVERTIBLE PREFERRED STOCK On March 2, 2020, the Company authorized the sale and issuance of up to 9,049,783 shares of Series C Preferred Stock, par value $ 0.0001 per share, of which 4,169,822 shares were sold at a purchase price of $ 13.43 per share for gross proceeds of F-16 $ 56.0 million. Issuance costs were approximately $ 0.2 million. As part of the Company's Series C Preferred Stock issuance, 3,078,968 of the shares were issued to affiliates of members of the Board. All issued shares reflect the reverse stock split effected March 31, 2020 while the Board authorized shares reflect the original number of shares authorized pre-split. On April 13, 2020, upon the closing of the Company's IPO, all outstanding shares of Preferred Stock converted into 10,725,129 shares of the Company's common stock. Additionally, effective April 13, 2020, the Company's amended and restated certificate of incorporation authorized the issuance of 10,000,000 shares of preferred stock. There were no outstanding shares of Preferred Stock as of December 31, 2021 and 2020. 9. COMMON STOCK As of December 31, 2021, the Company’s certificate of incorporation authorized the Company to issue 200,000,000 shares of $ 0.0001 par value common stock. On April 13, 2020, the Company completed its IPO, in which the Company issued and sold 6,900,000 shares of its common stock, which includes 900,000 shares issued and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $ 16.00 per share, for aggregate gross proceeds of $ 110.4 million. The Company received approximately $ 100.1 million in net proceeds after deducting underwriting discounts and commissions and offering costs. In connection with the IPO, all outstanding shares of Preferred Stock automatically converted into 10,725,129 shares of common stock at the applicable conversion ratio then in effect. In connection with the IPO, the Board and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a one-for-2.1703 reverse stock split of its issued and outstanding shares of common stock and convertible preferred stock, as well as to effect a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock. The reverse stock split was effected on March 31, 2020. Accordingly, all share and per share amounts of common stock for all periods presented in the accompanying audited consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this reverse stock split and adjustment of preferred stock conversion ratios. On November 17, 2020, the Company completed an underwritten public offering in which the Company issued and sold 2,990,000 shares of common stock at a public offering price of $ 50.00 per share, which includes 390,000 shares of common stock issued pursuant to the exercise in full of the over-allotment option by the underwriters. The aggregate gross proceeds to the Company from the public offering were approximately $ 149.5 million. The Company received approximately $ 140.1 million in net proceeds after deducting underwriting discounts and commissions and offering costs. For the year ended December 31, 2021, the Company raised gross proceeds of $ 28.6 million pursuant to the ATM Offering through the sale of 520,000 shares of common stock at a weighted average price of $ 55.00 per share. The net proceeds from the ATM Offering were approximately $ 28.1 million after deducting sales agent commissions of $ 0.4 million and offering expenses of $ 0.1 million. As of December 31, 2021, the Company was eligible to offer and sell, from time to time, shares of its common stock for an aggregate offering amount of up to the remaining $ 121.4 million available under the ATM Offering. The following is a summary of the rights and privileges of the holders of common stock as of December 31, 2021: Liquidation Preference: In the event of liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all debts and other liabilities and the satisfaction of any liquidation preference granted to the holders of any then-outstanding shares of preferred stock. Dividends: Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the Board out of legally available funds. As of December 31, 2021, no cash dividends have been declared or paid. Voting Rights: Each holder of common stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors. Under the Company's amended and restated certificate of incorporation and amended and restated bylaws, stockholders will not have cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they should so choose. Rights and Preferences : Holders of common stock have no preemptive, conversion or subscription rights and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that the Company may designate in the future. F-17 As of December 31, 2021 and 2020, the Company has reserved the following shares of common stock for the potential exercise of stock options: DECEMBER 31, 2021 2020 Options to purchase common stock 2,810,684 2,499,603 Total 2,810,684 2,499,603 10. STOCK-BASED COMPENSATION 2017 Stock Incentive Plan The Board adopted the 2017 Stock Incentive Plan (the "2017 Plan") in February 2017, and the stockholders approved the 2017 Plan in March 2017. The 2017 Plan was most recently amended in March 2020. As of December 31, 2021, there were an aggregate of 727,742 shares of common stock issuable upon the exercise of outstanding options under the 2017 Plan. Any options or awards outstanding under the 2017 Plan remain outstanding and effective. 2020 Equity Incentive Plan In April 2020, the 2020 Equity Incentive Plan (the "2020 Plan") became effective, and, as a result, no further awards will be made under the 2017 Plan. The 2020 Plan provides for the grant of stock options qualifying as incentive stock options ("ISOs"), to employees and for the grant of nonstatutory stock options ("NSOs"), restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards and other forms of stock compensation to employees, consultants and directors. The 2020 Plan also provides for the grant of performance cash awards to employees, consultants and directors. Any previously granted awards under the 2017 Plan will remain outstanding in accordance with their respective terms. Under the 2020 Plan, there is an annual increase on January 1 of each year from January 1, 2021 continuing through January 1, 2030, by 4.0 % of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board. On January 1, 2021, the Company increased the number of shares available for future grant under the 2020 Plan by 927,714 shares. On January 1, 2022, the Company increased the number of shares available for future grant under the 2020 Plan by 958,993 shares. The awards granted under the 2020 Plan typically vest over a four-year period and have a 10-year contractual term. As of December 31, 2021, there were an aggregate of 2,082,942 shares of common stock issuable upon the exercise of outstanding options under the 2020 Plan. Additionally, there were an aggregate of 894,104 shares reserved for future issuance under the 2020 Plan, including shares forfeited from the 2017 Plan. Stock Option Valuation The assumptions that the Company used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted for the years ended December 31, 2021 and 2020 were as follows: YEAR ENDED DECEMBER 31, 2021 2020 Weighted-average risk-free interest rate 0.88 % 0.53 % Expected term (in years) 6.05 6.06 Expected volatility 83.00 % 99.10 % Expected dividend yield 0.00 % 0.00 % F-18 A summary of option activity during the years ended December 31, 2021 and 2020 is as follows (in thousands except share and per share data): NUMBER OF OPTIONS WEIGHTED- AVERAGE EXERCISE PRICE WEIGHTED-AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS) AGGREGATE INTRINSIC VALUE Outstanding as of January 1, 2021 2,499,603 $ 11.77 8.62 $ 147,103 Granted 750,408 60.32 Exercised ( 261,968 ) 1.45 $ 13,276 Cancelled or forfeited ( 175,984 ) 28.67 Expired ( 1,375 ) 50.77 Outstanding as of December 31, 2021 2,810,684 $ 24.62 8.11 $ 11,383 Options exercisable as of December 31, 2021 1,223,019 $ 10.48 7.37 $ 9,524 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The weighted-average grant date fair value price per share of options granted during each of the years ended December 31, 2021 and 2020 was $ 42.29 and $ 15.57 , respectively. As of December 31, 2021, there was $ 35.3 million of unrecognized stock-based compensation expense related to unvested stock options. The unrecognized stock-based compensation expense is estimated to be recognized over a period of 2.60 years. The total fair value of options vested during the year ended December 31, 2021 was $ 10.1 million. Shares of Restricted Common Stock The Company has granted shares of restricted common stock with time-based vesting conditions. A summary of restricted stock activity under the 2017 Plan during the years ended December 31, 2021 and 2020 is as follows: YEAR ENDED DECEMBER 31, 2021 2020 Unvested at the beginning of the year — 34,557 Vested or released — ( 34,557 ) Unvested at the end of the year — — As of December 31, 2021, there was $ 0 of unrecognized stock-based compensation expense related to unvested restricted stock. The total fair value of restricted stock vested during the year ended December 31, 2020 was not material. Stock-Based Compensation Expense Total stock-based compensation expense recorded as research and development and general and administrative expenses, respectively, for employees, directors and non-employees during the years ended December 31, 2021 and 2020 is as follows (in thousands): YEAR ENDED DECEMBER 31, 2021 2020 Research and development $ 4,258 $ 1,322 General and administrative 7,464 2,775 Total stock-based compensation expense $ 11,722 $ 4,097 F-19 11. INCOME TAXES Loss before provision from income taxes for the years ended December 31, 2021 and 2020 consisted of the following (in thousands): YEAR ENDED DECEMBER 31, 2021 2020 United States $ ( 55,961 ) $ ( 31,898 ) Foreign ( 772 ) ( 13,635 ) Loss before provision from income taxes $ ( 56,733 ) $ ( 45,533 ) The components of income tax provision (benefit) for the years ended December 31, 2021 and 2020 consisted of the following (in thousands): YEAR ENDED DECEMBER 31, 2021 2020 Current income tax provision (benefit): Federal $ — $ ( 172 ) State 11 — Foreign 2,000 — Total current income tax provision (benefit) $ 2,011 $ ( 172 ) Total deferred income tax benefit $ — $ — Total income tax provision (benefit) $ 2,011 $ ( 172 ) A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective income tax rate for the years ended December 31, 2021 and 2020 was as follows: YEAR ENDED DECEMBER 31, 2021 2020 Federal income tax at statutory rate 21.0 % 21.0 % State income tax, net of federal benefit 6.7 4.7 Stock compensation ( 1.5 ) ( 1.1 ) Permanent differences — ( 0.3 ) Preferred stock tranche obligation remeasurement — ( 0.7 ) Research and development credits 4.8 1.5 Impact of foreign operations ( 0.6 ) 2.0 Foreign withholding taxes ( 2.8 ) — Other ( 0.3 ) ( 0.3 ) Change in valuation allowance ( 30.9 ) ( 26.4 ) Effective tax rate ( 3.5 ) % 0.4 % F-20 Net deferred tax assets as of December 31, 2021 and 2020 consisted of the following (in thousands): YEAR ENDED DECEMBER 31, 2021 2020 Net operating loss carryforwards $ 23,723 $ 10,324 Research and development credits 6,315 2,766 Accrueds 895 639 Other 4,668 4,319 Intangibles 127 139 Total deferred tax assets $ 35,728 $ 18,187 Valuation allowance ( 35,445 ) ( 17,938 ) Net deferred tax assets $ 283 $ 249 Deferred tax liability Depreciation ( 283 ) ( 249 ) Net deferred tax assets (liability) $ — $ — As of December 31, 2021, the Company had U.S. federal, state and foreign net operating loss carryforwards of $ 85.8 million, $ 90.3 million and $ 16.4 million, respectively. Of the $ 85.8 million federal net operating losses, $ 0.2 million will expire in 2035 and the remaining $ 85.6 million can be carried forward indefinitely. The federal and foreign net operating losses can be carried forward indefinitely. The state net operating loss carryforwards begin to expire in 2039. As of December 31, 2021, the Company had U.S. federal and state research and development tax credit carryforwards of $ 4.3 million and $ 2.5 million, respectively. As of December 31, 2020, the Company had U.S. federal and state research and development tax credit carryforwards of $ 1.8 million and $ 1.2 million, respectively. The tax credits begin to expire in 2038. Under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), the net operating loss and tax credit carryforwards are subject to review and potential adjustments by the Internal Revenue Services and state tax authorities. Under Section 382 of the Code (“Section 382”), certain substantial changes in the Company’s ownership, including the sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards or tax credits which could be used annually to offset future taxable income. The Company completed an analysis under Section 382 through November 17, 2020 and determined that on April 15, 2016 and April 13, 2020, ownership changes had occurred. Based on the Company’s analysis, the Company has determined that $ 0.3 million and $ 0.3 million of its federal and state net operating loss carryforwards, respectively, are limited by Section 382 as of December 31, 2021 and have been written off in the current period. The remaining unused carryforwards remain available for future periods. The Company may also experience ownership changes in the future as a result of subsequent shifts in the Company’s stock ownership, some of which may be outside the Company’s control. As a result, its ability to use its pre-change NOLs or tax credits to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. Management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of research and development credits and net operating losses. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, a full valuation allowance was maintained as of December 31, 2021 and 2020. A change in the Company’s valuation allowance was recorded in 2021 and 2020, in the amount of $ 17.5 million and $ 12.0 million, respectively, due primarily to the generation of additional net deferred tax assets. The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which it operates or does business in. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company records tax positions as liabilities and adjusts these liabilities when its judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of December 31, 2021 and 2020, the Company has not recorded any uncertain tax positions in its financial statements. F-21 The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of December 31, 2021 and 2020, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet. The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from December 31, 2016, to the present. There are currently no pending income tax examinations. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service and state tax authorities to the extent utilized in a future period. 12. COMMITMENTS AND CONTINGENCIES Leases The Company has historically entered into lease arrangements for its facilities and certain equipment. As of December 31, 2021, the Company had one operating lease with required future payments, related to its real estate. In applying the transition guidance under ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), early adopted by the Company effective March 1, 2017, the Company determined the classification of its real estate lease to be operating and recorded a ROU asset and lease liability as of the effective date. Operating Leases In March 2017, the Company entered into a lease agreement (the “Lexington Lease”) for its headquarters located in Lexington, Massachusetts. In July and August 2019, the Company entered into the first and second amendment, respectively, to its Lexington Lease to expand the rental space to 10,417 square feet. In August 2021, the Company entered into a third amendment to its Lexington Lease (the "Third Amendment") to extend the lease term through March 31, 2023 and to further expand the rental space to 15,622 square feet. The lease modification from the Third Amendment resulted in a non-cash increase to the Company's operating lease liabilities and right-of-use assets of $ 0.7 million in the quarter ended September 30, 2021. As required under the term of the lease agreement as collateral for the facility lease, the Company had restricted cash of $ 0.1 million in the form of a certificate of deposit as of December 31, 2021 and 2020. The Lexington Lease provides for scheduled annual rent increases throughout the lease term and does not include termination or purchase options. From time to time, leases may include options to renew the lease after the expiration of the initial lease term. A renewal period is included in the lease term only when it is reasonably certain that the Company will exercise such renewal options. As of December 31, 2021, no renewal options existed that the Company believed were reasonably certain of being exercised. The following table contains a summary of the lease costs recognized under ASC 842 and other information pertaining to the Company’s operating lease for the years ended December 31, 2021 and 2020 (in thousands): FOR THE YEARS ENDED DECEMBER 31, 2021 2020 Lease cost Operating lease cost $ 587 $ 468 Total lease cost $ 587 $ 468 Other information Operating lease payments $ 587 $ 468 Remaining lease term 1.3 years 1.9 years Discount rate 7.27 % 8.02 % The Lexington Lease does not include any variable payments. As the Lexington Lease does not provide an implicit rate, the Company utilized its incremental borrowing rate based on what it would normally pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments at the commencement date in determining the present value of lease payments. As of December 31, 2021 and 2020, the Company classified its short-term and long-term operating liabilities as short-term and long-term liabilities on the consolidated balance sheet, respectively. F-22 As of December 31, 2021, future discounted lease payments under all lease arrangements accounted for under ASC 842 were as follows (in thousands): MATURITY OF LEASE LIABILITY 2022 $ 913 2023 234 Total lease payments 1,147 Less: imputed interest ( 54 ) Total operating lease liabilities $ 1,093 Included in the consolidated balance sheet: Current portion of lease liabilities $ 862 Lease liabilities 231 Total operating lease liabilities $ 1,093 On September 7, 2021, the Company entered into an indenture of lease (the “1050 Waltham Lease”) with Revolution Labs Owner, LLC (the “Landlord”), pursuant to which the Company will lease approximately 35,662 square feet of office and laboratory space located at 1050 Waltham Street, Lexington, Massachusetts for its new principal executive office. The 1050 Waltham Lease has not yet commenced as of December 31, 2021 and is therefore not included in the maturity table above. The term of the 1050 Waltham Lease is currently expected to commence in the fourth quarter of 2022, on the date that the Landlord delivers the premises to the Company, which shall be after the substantial completion of agreed upon improvements to be performed by the Landlord (such date, the "Commencement Date"). This work is not expected to begin until the second quarter of 2022. The Company’s obligation for the payment of base rent for the premises begins four months after the Commencement Date (the “Rent Commencement Date”) and will initially be fixed at $ 0.2 million per month, which will increase by approximately 3 % per annum. The Company will be obligated to reimburse the Landlord for certain variable costs, including its proportional share (approximately 20 % of the rentable area of the building) of taxes and operating expenses, as specified in the 1050 Waltham Lease. The 1050 Waltham Lease has a term of eight years and four months, measured from the Commencement Date. The Company has the option to extend the term of the 1050 Waltham Lease for a period of an additional five years . In connection with its entry into the 1050 Waltham Lease and as a security deposit, the Company has provided the Landlord a letter of credit in the amount of approximately $ 1.2 million. The Landlord has the right to terminate the 1050 Waltham Lease upon customary events of default. The Company has the right to terminate the 1050 Waltham Lease if (i) the Landlord work on the premises has not commenced on or prior to July 1, 2022 or (ii) the premises are not ready for occupancy within a specified time period after October 21, 2022. Short-term Leases The Company enters into short-term leasing arrangements related to storage of clinical trial materials. The Company has $ 5,089 and $ 36,290 related to rent expense for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Company classified its short-term operating lease liabilities within accrued expenses and other current liabilities, as the Company has elected the practical expedient whereby it will not recognize leases with terms of 12 months or less on the balance sheet. Legal Proceedings The Company is not a party to any litigation and does not have contingency reserves established for any litigation liabilities. Other In connection with the Lexington Lease entered into in March 2017, the Company received a loan from the landlord of $ 0.2 million related to its tenant improvement allowance, which is recorded as a non-current liability in the Company’s consolidated balance sheets. The Company is required to repay interest only on the loan of 8.0 % for the first 18 months of the lease and will then repay the full amount plus interest in installments over the remaining 3.5 year term of the lease, which expires in December 2022. The Company made payments totaling $ 65,000 related to the loan in 2021. Future payments under the Company’s loan obligation as of December 31, 2021, are as follows (in thousands): 2022 $ 65 2023 — Total payments $ 65 F-23 Refer to Note 7, License Agreements, for any potential future milestone or royalty payment amounts. These are not currently probable or estimable. 13. REVENUE FROM CONTRACTS WITH CUSTOMERS Neurona License Agreement On June 22, 2021, the Company entered into a license agreement (the "Neurona Agreement") with Neurona. Under the Neurona Agreement, the Company granted Neurona a non-exclusive license to use LDN-193189, an early-stage research compound, which the Company licenses from a third party, solely as a reagent in connection with the manufacturing of diagnostic and/or therapeutic products to make, have made, use, import, offer for sale and sell products and services arising therefrom, and to make, have made, acquire, transfer, import and export the compound for such use. The license excludes Neurona from any rights to use, sell or distribute the compound for any therapeutic or diagnostic purpose. Unless terminated by either party for breach of contract or insolvency, the Neurona Agreement, which commenced on the execution date, will continue in perpetuity until the last patent expires. Under the Neurona Agreement, the Company was paid a one-time, upfront license payment of $ 0.1 million from Neurona as of December 31, 2021. In accordance with the Company's ASC 606 assessment, Neurona is considered to be a customer. The Company identified a single performance obligation, the non-exclusive license, that was satisfied on the date of the execution of the Neurona Agreement when control of the license was transferred. The Company determined that the upfront license fee of $ 0.1 million constitutes the entire transaction price and does not require further allocation as there was only one performance obligation. The Company determined that the $ 0.1 million represented the point at which the licensee was able to use and benefit from the license and recognized revenue from upfront license fees when the license was transferred to Neurona upon execution of the Neurona Agreement. The Company recognized the upfront fee as revenue on its consolidated statement of operations for the year ended December 31, 2021. Hansoh License Agreement In December 2021, the Company entered into a license agreement with Hansoh (the “Hansoh Agreement”). Under the Hansoh Agreement, the Company granted to Hansoh the exclusive right to develop, manufacture and commercialize KER-050 and licensed products containing KER-050 within the territories of mainland China, Hong Kong and Macau (the “Territory”). In connection with the Hansoh Agreement, Hansoh will purchase clinical trial supply of KER-050 from the Company, and the parties will also negotiate in good faith to enter into an agreement for commercial supply prior to any anticipated commercialization in the Territory. In addition, Hansoh will use commercially reasonable efforts to develop, obtain regulatory approval for, and commercialize licensed products in any region in the Territory. Pursuant to the Hansoh Agreement, the Company is due a one-time, $ 20.0 million upfront license payment and will also be eligible to receive up to an aggregate of (i) $ 26.5 million upon the achievement of specified development milestones and (ii) $ 144.0 million upon the achievement of specified net sales thresholds for all licensed products in the Territory. If a licensed product is approved for marketing in the Territory, the Company will be entitled to receive royalty payments based on a tiered percentage of annual net sales in each region within the Territory, with such percentage ranging from the low double digit to high teens, subject to specified potential royalty reductions. Hansoh’s obligation to pay royalties for a given licensed product in a given region in the Territory will begin on the date of the first commercial sale for such licensed product in such region and continue until the latest of (i) 10 years from the date of the first commercial sale for such licensed product in such region, (ii) the expiration of the last valid claim of certain licensed patents or joint patents, and (iii) expiration of regulatory exclusivity in such region. During the royalty term, neither party will directly or indirectly commercialize a competing product in the Territory. The Hansoh Agreement will continue in force on a region-by-region basis until the expiration of the royalty term. Hansoh may terminate the Agreement in its entirety for convenience, with notice. The Company may terminate the Hansoh Agreement in its entirety for a patent challenge brought by Hansoh or its affiliates or their sublicensees. Either party may terminate the Hansoh Agreement in its entirety (i) if the other party materially breaches the Hansoh Agreement and fails to cure such breach or (ii) upon the bankruptcy of the other party. The Company evaluated the Hansoh Agreement and concluded that it was subject to ASC 606, as the Company viewed the Hansoh Agreement as a contract with a customer. As such, the Company assessed the terms of the Hansoh Agreement and identified a single performance obligation for the Company to provide Hansoh an exclusive license to develop, manufacture and commercialize KER-050 and licensed products containing KER-050 in the Territory, including the underlying know-how related to such licenses. All other promised goods/services were deemed immaterial in the context of the Hansoh Agreement. The transaction price of the Hansoh Agreement is equal to the full $ 20.0 million, which includes the one-time, non-refundable, non-creditable initial payment. All potential milestone payments (development and commercial), and royalty payments are F-24 forms of variable consideration that are fully constrained as of the date of the Hansoh Agreement, and therefore, excluded from the transaction price. The Company allocated 100 % of the transaction price to the single performance obligation. The Company recognized the upfront fee of $ 20.0 million as revenue and $ 2.0 million in withholding tax on its consolidated statement of operations for the year ended December 31, 2021, and a receivable, net of withholding tax on its consolidated balance sheet as of December 31, 2021. The Company received the one-time upfront license payment from Hansoh in January 2022. The Company will recognize development milestone payments as revenue at the point in time when it is determined that it is probable such milestones will be achieved as all performance obligations will have been satisfied at the point which a milestone might occur (i.e., Hansoh will have assumed all responsibility for the activities under the Hansoh Agreement). The Company will recognize royalty payments and commercial milestone payments as the associated sales of licensed products are recorded by Hansoh, as they predominantly relate to the license granted with the Hansoh Agreement. F-25