Praxis Precision Medicines, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 140 Consolidated Balance Sheets 141 Consolidated Statements of Operations and Comprehensive Loss 142 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ (Deficit) Equity 143 Consolidated Statements of Cash Flows 144 Notes to Consolidated Financial Statements 145 139 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Praxis Precision Medicines, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Praxis Precision Medicines, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ (deficit) equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. 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/ Ernst & Young LLP We have served as the Company’s auditor since 2019. Boston, Massachusetts March 17, 2021 140 Table of Contents PRAXIS PRECISION MEDICINES, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data) December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 296,608 $ 44,815 Prepaid expenses and other current assets 5,718 681 Total current assets 302,326 45,496 Property and equipment, net 82 128 Operating lease right-of-use assets 754 1,450 Other non-current assets 15 620 Total assets $ 303,177 $ 47,694 Liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity Current liabilities: Accounts payable $ 4,088 $ 2,667 Accrued expenses 10,869 3,455 Operating lease liabilities 763 696 Total current liabilities 15,720 6,818 Long-term liabilities: Non-current portion of operating lease liabilities — 763 Total liabilities 15,720 7,581 Commitments and contingencies (Note 7) Series A redeemable convertible preferred stock, $ 0.0001 par value; 8,075,799 shares authorized and 8,075,799 shares issued and outstanding as of December 31, 2019; liquidation value of $ 9,932 as of December 31, 2019 — 9,932 Series B redeemable convertible preferred stock, $ 0.0001 par value; 14,913,704 shares authorized and 14,913,704 shares issued and outstanding as of December 31, 2019; liquidation value of $ 49,969 as of December 31, 2019 — 49,969 Series B-1 redeemable convertible preferred stock, $ 0.0001 par value; 2,666,666 shares authorized and 2,666,666 shares issued and outstanding as of December 31, 2019; liquidation value of $ 10,431 as of December 31, 2019 — 10,431 Series C redeemable convertible preferred stock, $ 0.0001 par value; 11,067,963 shares authorized and 9,805,827 shares issued and outstanding as of December 31, 2019; liquidation value of $ 50,789 as of December 31, 2019 — 50,789 Stockholders’ equity (deficit): Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized and no shares issued or outstanding as of December 31, 2020 — — Common stock, $ 0.0001 par value; 150,000,000 shares and 46,000,000 shares authorized as of December 31, 2020 and 2019, respectively; 38,268,543 shares issued and outstanding as of December 31, 2020, and 1,670,070 shares issued and 1,621,880 shares outstanding as of December 31, 2019 4 1 Additional paid-in capital 437,007 — Accumulated deficit ( 149,554 ) ( 81,009 ) Total stockholders’ equity (deficit) 287,457 ( 81,008 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 303,177 $ 47,694 The accompanying notes are an integral part of these consolidated financial statements. 141 Table of Contents PRAXIS PRECISION MEDICINES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Amounts in thousands, except share and per share data) Year Ended December 31, 2020 2019 Operating expenses: Research and development $ 44,976 $ 29,557 General and administrative 16,992 6,232 Total operating expenses 61,968 35,789 Loss from operations ( 61,968 ) ( 35,789 ) Total other income: Interest income 140 193 Total other income 140 193 Loss before benefit from income taxes ( 61,828 ) ( 35,596 ) Benefit from income taxes ( 8 ) ( 84 ) Net loss and comprehensive loss $ ( 61,820 ) $ ( 35,512 ) Accretion and cumulative dividends on redeemable convertible preferred stock ( 8,996 ) ( 5,170 ) Gain on repurchase of redeemable convertible preferred stock 493 — Net loss attributable to common stockholders $ ( 70,323 ) $ ( 40,682 ) Net loss per share attributable to common stockholders, basic and diluted $ ( 7.86 ) $ ( 26.60 ) Weighted average common shares outstanding, basic and diluted 8,950,152 1,529,629 The accompanying notes are an integral part of these consolidated financial statements. 142 Table of Contents PRAXIS PRECISION MEDICINES, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ (DEFICIT) EQUITY (Amounts in thousands, except share data) Series A Redeemable Convertible Preferred Stock Series B Redeemable Convertible Preferred Stock Series B-1 Redeemable Convertible Preferred Stock Series C Redeemable Convertible Preferred Stock Series C-1 Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders’ (Deficit) Equity Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2018 8,075,799 $ 9,284 14,913,704 $ 46,436 — $ — — $ — $ — — 1,408,677 $ 1 $ 326 $ ( 41,365 ) $ ( 41,038 ) Issuance of Series B-1 redeemable convertible preferred stock, net of issuance costs of $ 61 — — — — 2,666,666 9,939 — — — — — — — — — Issuance of Series C redeemable convertible preferred stock, net of issuance costs of $ 165 — — — — — — 9,805,827 50,336 — — — — — — — Stock-based compensation expense — — — — — — — — — — — — 668 — 668 Accretion of redeemable convertible preferred stock to redemption value — 648 — 3,533 — 492 — 453 — — — — ( 994 ) ( 4,132 ) ( 5,126 ) Vesting of restricted stock awards — — — — — — — — — — 213,203 — — — — Net loss — — — — — — — — — — — — — ( 35,512 ) ( 35,512 ) Balance at December 31, 2019 8,075,799 $ 9,932 14,913,704 $ 49,969 2,666,666 $ 10,431 9,805,827 $ 50,789 $ — — 1,621,880 $ 1 $ — $ ( 81,009 ) $ ( 81,008 ) Repurchase of Series C redeemable convertible preferred stock — — — — — ( 5,825,243 ) ( 30,493 ) — — — — — 493 493 Issuance of Series C redeemable convertible preferred stock, net of issuance costs of $ 41 — — — — — 4,563,108 23,459 — — — — — — — Issuance of Series C-1 redeemable convertible preferred stock, net of issuance costs of $ 154 — — — — — — — 19,444,453 110,096 — — — — — Accretion of redeemable convertible preferred stock to redemption value — 519 — 2,875 — 642 — 2,682 — 2,278 — — ( 1,778 ) ( 7,218 ) ( 8,996 ) Conversion of redeemable convertible preferred stock to common stock ( 8,075,799 ) ( 10,451 ) ( 14,913,704 ) ( 52,844 ) ( 2,666,666 ) ( 11,073 ) ( 8,543,692 ) ( 46,437 ) ( 19,444,453 ) ( 112,374 ) 25,067,977 2 233,176 — 233,178 Issuance of common stock upon initial public offering, net of underwriting discounts, commissions and offering costs — — — — — — — — — 11,500,000 1 200,310 — 200,311 Vesting of restricted common stock awards — — — — — — — — — 48,190 — — — — Exercise of stock options — — — — — — — — — 30,496 — 88 — 88 Stock-based compensation expense — — — — — — — — — — — 5,211 — 5,211 Net loss — — — — — — — — — — — — ( 61,820 ) ( 61,820 ) Balance at December 31, 2020 — $ — — $ — — $ — — $ — $ — $ — 38,268,543 $ 4 $ 437,007 $ ( 149,554 ) $ 287,457 The accompanying notes are an integral part of these consolidated financial statements. 143 Table of Contents PRAXIS PRECISION MEDICINES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended December 31, 2020 2019 Cash flows from operating activities: Net loss $ ( 61,820 ) $ ( 35,512 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 50 37 Stock-based compensation expense 5,211 668 Non-cash operating lease expense 696 642 Changes in operating assets and liabilities: Prepaid expenses and other current assets ( 4,437 ) 495 Other non-current assets 5 — Accounts payable 960 ( 837 ) Accrued expenses 7,408 1,742 Operating lease liabilities ( 696 ) ( 633 ) Other — ( 22 ) Net cash used in operating activities ( 52,623 ) ( 33,420 ) Cash flows from investing activities: Purchases of property and equipment — ( 103 ) Net cash used in investing activities — ( 103 ) Cash flows from financing activities: Proceeds from initial public offering of common stock, net of issuance costs 200,886 — Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs 133,442 60,388 Repurchase of Series C redeemable convertible preferred stock ( 30,000 ) — Proceeds from exercise of options to purchase common stock 88 — Net cash provided by financing activities 304,416 60,388 Increase in cash, cash equivalents and restricted cash 251,793 26,865 Cash, cash equivalents and restricted cash, beginning of period 45,415 18,550 Cash, cash equivalents and restricted cash, end of period $ 297,208 $ 45,415 Supplemental disclosures of non-cash activities: Accretion of redeemable convertible preferred stock to redemption value $ 8,996 $ 5,126 Operating lease liabilities recorded upon adoption of ASC 842 $ — $ 2,092 Purchases of property and equipment included in accounts payable $ 4 $ — Deferred offering costs included in accounts payable and accrued expenses $ 575 $ — Redeemable convertible preferred stock issuance costs included in accounts payable $ — $ 113 The accompanying notes are an integral part of these consolidated financial statements. 144 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of the Business Praxis Precision Medicines, Inc. (“Praxis” or the “Company”) is a clinical-stage biopharmaceutical company translating genetic insights into the development of therapies for central nervous system (“CNS”) disorders characterized by neuronal imbalance. The Company has established a broad portfolio, including multiple disclosed programs across CNS disorders, including depression, epilepsy, movement disorders and pain syndromes, with three clinical-stage product candidates. We intend to develop differentiated therapies that can deliver long-term benefits to human health by meaningfully impacting patients and society. The Company’s most advanced programs, PRAX-114 and PRAX-944, are currently in Phase 2 development. PRAX-114 is being developed for the treatment of major depressive disorder and perimenopausal depression, and PRAX-944 is a selective small molecule inhibitor of T-type calcium channels for the treatment of essential tremor. Praxis was incorporated in 2015 and commenced operations in 2016. The Company has funded its operations primarily with proceeds from the issuance of convertible debt, Series A redeemable convertible preferred stock (the “Series A Preferred Stock”), Series B redeemable convertible preferred stock (the “Series B Preferred Stock”), Series B-1 redeemable convertible preferred stock (the “Series B-1 Preferred Stock”), Series C redeemable convertible preferred stock (the “Series C Preferred Stock”) and Series C-1 redeemable convertible preferred stock (the Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock are collectively referred to as the “Redeemable Convertible Preferred Stock”), and from proceeds from its initial public offering ("IPO"). From inception through December 31, 2020, the Company raised $ 411.0 million in aggregate cash proceeds from these transactions, net of issuance costs. On October 8, 2020, the board of directors and the Company’s stockholders approved a one-for-2.14 reverse stock split. Effective on October 8, 2020, the reverse stock split impacted the Company’s issued and outstanding shares of common stock. Stockholders entitled to fractional shares as a result of the reverse stock split are entitled to receive a cash payment in lieu of receiving fractional shares. All shares of common stock, per share amounts, aggregate par value and additional paid-in capital amounts for all periods presented in the accompanying consolidated financial statements and related notes have been retroactively adjusted, where applicable, to reflect the reverse stock split. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately reduced and the respective exercise prices were proportionately increased, as applicable, in accordance with the terms of the agreements governing such securities. The respective conversion prices of the Redeemable Convertible Preferred Stock were proportionately increased. The number of shares of common stock authorized for issuance and the per share par value of common stock were not adjusted as a result of the reverse stock split. On October 20, 2020, the Company completed its IPO, in which the Company issued and sold 11,500,000 shares of its common stock at a public offering price of $ 19.00 per share, including 1,500,000 shares of common stock sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock, for aggregate gross proceeds of $ 218.5 million. The Company raised approximately $ 200.3 million in net proceeds after deducting underwriting discounts and commissions and offering expenses payable by the Company. Upon the closing of the IPO, all of the outstanding shares of the Company’s Redeemable Convertible Preferred Stock automatically converted into 25,067,977 shares of common stock. On October 20, 2020, in connection with the closing of the IPO, the Company filed its Amended and Restated Certificate of Incorporation which provides that the authorized capital stock of the Company consists of 150,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock, both with a par value of $ 0.0001 per share. The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including but not limited to, risks associated with completing preclinical studies and clinical trials, receiving regulatory approvals for product candidates, development by competitors of new biopharmaceutical products, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. Programs currently under development will require significant additional research and development efforts, including preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate 145 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales. Liquidity In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40) , the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. The Company has incurred recurring losses since its inception, including net losses of $ 61.8 million and $ 35.5 million for the years ended December 31, 2020 and 2019, respectively. In addition, as of December 31, 2020, the Company had an accumulated deficit of $ 149.6 million. The Company expects to continue to generate operating losses for the foreseeable future. As a result of proceeds raised from its IPO and issuance of its Series C Preferred Stock and Series C-1 Preferred Stock, the Company expects that its cash and cash equivalents as of December 31, 2020 of $ 296.6 million will be sufficient to fund the operating expenditures and capital expenditure requirements necessary to advance its research efforts and clinical trials for at least one year from the date of issuance of these consolidated financial statements. The future viability of the Company beyond one year from the date of issuance of these consolidated financial statements is dependent on its ability to raise additional capital to finance its operations. The Company's inability to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. There can be no assurance that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or at all. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and ASUs of the FASB. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Praxis Security Corporation and Praxis Precision Medicines Australia Pty Ltd. All intercompany transactions have been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting periods. Significant estimates and assumptions reflected in these consolidated financial statements include, but are not limited to, the accrual for research and development expenses, stock-based compensation expense, the valuation of equity awards and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ materially from those estimates. Segments 146 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a consolidated basis for the purposes of assessing performance and allocating resources. The majority of the Company’s long-lived assets are held in the United States. Cash, Cash Equivalents and Restricted Cash The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash equivalents. Cash and cash equivalents include cash held in banks and amounts held in interest-bearing money market funds. Cash equivalents are carried at cost, which approximates their fair market value. Restricted cash comprises a letter of credit for the benefit of the landlord in connection with the Company’s lease facility. Restricted cash is classified as either current or non-current based on the terms of the underlying lease arrangement. The following table presents cash, cash equivalents and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands): December 31, 2020 2019 Cash and cash equivalents $ 296,608 $ 44,815 Restricted cash 600 600 Total cash, cash equivalents and restricted cash as shown on the consolidated statements of cash flows $ 297,208 $ 45,415 Concentrations of Credit Risk and Significant Suppliers and License Agreements Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains deposits in accredited financial institutions in excess of federally insured limits. Bank accounts in the United States are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to $250,000. As of December 31, 2020 and 2019, the Company’s primary operating accounts significantly exceeded the FDIC limits. The Company deposits its cash in financial institutions that it believes have high credit quality, and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. The Company is dependent on third-party manufacturers to supply materials for research and development activities of its programs, including preclinical and clinical testing. In particular, the Company relies, and expects to continue to rely, on a small number of third-party manufacturers to produce and process its current and potential product candidates and to manufacture supply of its current and potential product candidates for preclinical and clinical activities. These programs could be adversely affected by a significant interruption in the supply of the necessary materials. The Company is also dependent on third parties who provide license rights used in the development of certain programs. The Company could experience delays in the development of its programs if any of these license agreements are terminated, if the Company fails to meet the obligations required under its arrangements, or if the Company is unable to successfully secure new strategic alliances or licensing agreements. Off-Balance Sheet Risk As of December 31, 2020 and 2019, the Company had no off-balance sheet risk such as foreign exchange contracts, option contracts or other hedging arrangements. Fair Value Measurements Certain assets and liabilities of the Company are carried at fair value under GAAP. The fair values of the Company’s financial assets and liabilities reflects the Company’s estimate of 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 147 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 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 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 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 carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities. Property and Equipment Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets: Estimated Useful Life Office furniture and equipment 5 years Laboratory equipment 3 years Computer equipment 3 years Upon disposal, retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations. Expenditures for repairs and maintenance that do not improve or extend the lives of the respective assets are charged to expense as incurred. Impairment of Long-Lived Assets Long-lived assets consist of property and equipment. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset group for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset group to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset group are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset group over its fair value, determined based on discounted cash flows. The Company did not record any impairment losses on long-lived assets in either year ended December 31, 2020 or December 31, 2019. 148 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . This standard established a right-of-use model that requires all lessees to recognize right-of-use assets and lease liabilities on their balance sheet that arise from leases as well as provide disclosures with respect to certain qualitative and quantitative information related to a company’s leasing arrangements to meet the objective of allowing users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The FASB subsequently issued the following amendments to ASU 2016-02 that have the same effective date and transition date: ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 , ASU No. 2018-10, Codification Improvements to Topic 842, Leases , ASU No. 2018-11, Leases (Topic 842): Targeted Improvements , ASU No. 2018-20, Narrow-Scope Improvement for Lessors , and ASU No. 2019-01, Leases (Topic 842): Codification Improvements . The Company adopted these amendments with ASU 2016-02 (collectively, the “new leasing standards”), effective January 1, 2019. The Company adopted the new leasing standards using the modified retrospective transition approach, with no restatement of prior periods and there was no cumulative adjustment to retained earnings. Upon adoption, the Company elected the package of transition practical expedients, which allowed the Company to not reassess the following: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the treatment of initial direct costs for existing leases. The Company made an accounting policy election to not recognize short-term leases with an initial term of twelve months or less within its consolidated balance sheets and to recognize those lease payments on a straight-line basis in its consolidated statements of operations and comprehensive loss over the lease term. Upon adopting the new leasing standards, the Company recognized an operating lease right-of-use asset of $ 2.1 million and a corresponding operating lease liability of $ 2.1 million, which are included in its consolidated balance sheets. The adoption of the new leasing standards did not have a material impact on the Company’s consolidated statements of operations and comprehensive loss. The Company determines if an arrangement is a lease at contract inception. Operating lease right-of-use assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent its obligation to make lease payments arising from the lease. Operating right-of-use assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised. The Company uses the implicit rate when readily determinable and uses its incremental borrowing rate when the implicit rate is not readily determinable, based upon the information available at the commencement date in determining the present value of the lease payments. The incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease. The lease payments used to determine operating lease right-of-use assets may include lease incentives and stated rent increases. The Company’s lease agreements may include both lease and non-lease components, which the Company accounts for as a single lease component when the payments are fixed, for all classes of underlying assets. Variable payments included in the lease agreement are expensed as incurred. The Company’s operating leases are reflected in operating lease right-of-use assets and in current operating lease liabilities and long-term operating lease liabilities in its consolidated balance sheets. The Company’s operating lease right-of-use asset as of December 31, 2020 and 2019 did not include any lease incentives. Lease expense for future lease payments is recognized on a straight-line basis over the lease term. There were no new leases entered into during the year ended December 31, 2020. Deferred Offering Costs The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After the consummation of the equity financing, these costs are recorded in stockholders’ (deficit) equity as a reduction of additional paid-in capital or the associated preferred stock account, as applicable. In the event the offering is 149 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) terminated, all capitalized deferred offering costs are expensed. Upon the closing of the IPO on October 20, 2020, deferred offering costs of $ 2.9 million were recognized through additional paid-in capital as a reduction of the gross proceeds received from the offering. No deferred offering costs were capitalized as of December 31, 2020 or December 31, 2019. Redeemable Convertible Preferred Stock Prior to the automatic conversion of all outstanding shares of the Redeemable Convertible Preferred Stock upon the closing of the IPO, the Company recorded all Redeemable Convertible Preferred Stock upon issuance at its respective fair value or original issuance price, less issuance costs and any associated discounts. The Company classified its Redeemable Convertible Preferred Stock outside of stockholders’ (deficit) equity as the redemption of such shares was outside the Company’s control. The Company adjusted the carrying values of the Redeemable Convertible Preferred Stock to redemption value when the redemption value exceeded the carrying value. Upon the closing of the IPO, all of the outstanding shares of Redeemable Convertible Preferred Stock automatically converted into 25,067,977 shares of common stock. Research and Development Costs Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, stock-based compensation and benefits, facilities costs, depreciation, third-party license fees, and external costs of outside vendors engaged to conduct preclinical development activities and clinical trials as well as to manufacture research and development materials. Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the goods are delivered or the related services are performed or until it is no longer expected that the goods will be delivered or the services rendered. Costs incurred to obtain licenses are recognized as research and development expense as incurred if the technology licensed has no alternative future uses. The Company has entered into various research and development related contracts with parties both inside and outside of the United States. These agreements are cancellable, and related fees are recorded as research and development expenses as incurred. The Company records accrued liabilities for estimated ongoing research costs. When evaluating the adequacy of the accrued liabilities, the Company analyzes progress of the studies or clinical trials, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates are made in determining the accrued balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs. Patent-Related Costs Patent-related costs incurred in connection with patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the accompanying consolidated statement of operations and comprehensive loss. Stock-Based Compensation The Company accounts for all stock-based awards granted to employees and non-employees as stock-based compensation expense at fair value in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). For stock-based awards issued to employees, non-employees and members of the Company’s board of directors (the “Board”) for their services on the Board, the Company measures the estimated fair value of the stock-based award on the date of the grant. The Company recognizes compensation expense for those awards granted to employees and members of the Board over the requisite service period, which is generally the vesting period of the respective award. For non-employee awards, compensation expense is recognized as the services are provided, which is generally ratably over the vesting period. The Company determines the fair value of restricted stock awards in reference to the fair value of its common stock less any applicable purchase price. The Company issues stock-based awards with service-based vesting conditions and records the expense for these awards on a straight-line basis over the vesting period. To date, the Company has not issued any stock-based awards with performance or market-based vesting conditions. The Company accounts for forfeitures as they occur. 150 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company classifies stock-based compensation expense in its consolidated statement of operations and comprehensive loss in the same manner in which the award recipient’s salary or service payments are classified. The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model, which requires inputs of subjective assumptions, including: (i) the expected volatility of the Company’s stock; (ii) the expected term of the award; (iii) the risk-free interest rate; (iv) expected dividends; and (v) the fair value of common stock. Due to the lack of Company-specific historical and implied volatility data, the Company determines the volatility for awards granted based on an analysis of reported data for a group of guideline publicly-traded companies that issued options with substantially similar terms. For this analysis, the Company selects companies with comparable characteristics including enterprise value, risk profiles, and with historical share price information sufficient to meet the expected life of the stock-based awards. The Company determines expected volatility using a weighted average of the historical volatilities of the guideline group of companies. The Company expects to continue to apply this process until such time as it has adequate historical data regarding the volatility of its own traded stock price. As permitted under ASC 718, the Company has elected to use the contractual term as the expected term for certain non-employee awards, on an award-by-award basis. For all other awards, the expected term of the Company’s stock options has been determined utilizing the “simplified” method whereby the expected term equals the average of the vesting term and the original contractual term of the option, on a weighted basis based on the vesting of each tranche. The Company utilizes this method as it has insufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. 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 instruments with a term commensurate with the expected term assumption. The expected dividend yield is assumed to be zero as the Company has never paid dividends, and does not have current plans to pay any dividends on its common stock. For periods prior to the IPO, the fair value of shares of common stock underlying the Company's stock-based awards was determined on each grant date due to the absence of an active market for the Company's common stock. The Company determined the estimated fair value of its equity instruments based on a number of objective and subjective factors, including external market conditions affecting the biotechnology industry sector. The Company utilized various valuation 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. Each valuation methodology included estimates and assumptions that required the Company’s judgment. These estimates and assumptions included a number of objective and subjective factors in determining the value of the Company’s common stock at each grant date, such as the following: (i) prices paid for the Company’s redeemable convertible preferred stock, and the rights, preferences, and privileges of the Company’s redeemable convertible preferred stock and common stock; (ii) the Company’s stage of development; (iii) the fact that the grants of stock-based awards related to illiquid securities in a private company; and (iv) the likelihood of achieving a liquidity event for the common stock underlying the stock-based awards, such as an IPO or sale of the Company, given prevailing market conditions. Prior to the IPO, the methodologies utilized to estimate the fair value of the Company’s common stock were the option-pricing method (“OPM”) and, beginning in the year ended December 31, 2020, the hybrid probability-weighted expected return method ("PWERM"). The OPM was used to back-solve the estimated value of the Company’s equity and corresponding value of the Company’s common stock. The hybrid PWERM determined the fair value of the Company's common stock using a probability-weighted present value of expected future investment returns considering various outcomes, as well as the rights of each class of stock, with one of the outcomes calculated using an OPM. The hybrid PWERM considered three scenarios: an "early" IPO completed in 2020, a "late" IPO completed in 2021, and a "remain private" scenario in which value was allocated using the OPM. An incremental discount for lack of marketability ("DLOM") was applied to the values of the common stock. The DLOM was estimated using a put option model which considered the expected time to liquidity and the volatility of the common shares. The hybrid PWERM used a risk-adjusted discount rate. The fair value of the Company's common stock was calibrated to contemporaneous transactions in the Series C Preferred Stock and Series C-1 Preferred Stock. Subsequent to the IPO, the fair value of the common stock underlying the Company's stock-based awards is the closing price of the Company's common stock on the date of grant. Foreign Currency 151 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The functional currency of the Company’s wholly owned foreign subsidiary in Australia is the U.S. dollar. Monetary assets and liabilities resulting from transactions denominated in currencies other than the functional currency are remeasured into the functional currency at exchange rates prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are measured using historical exchange rates prevailing at the date of the transaction and are not subsequently remeasured. Exchange gains or losses arising from foreign currency transactions are included in the determination of net loss. There were no material foreign currency gains or losses for the years ended December 31, 2020 and 2019. Income Taxes Deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent that it believes based upon the weight of available evidence it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established. The Company accounts for uncertain tax positions recognized in the consolidated financial statements by prescribing a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties. Comprehensive Loss Comprehensive loss includes net loss and certain changes in stockholders’ (deficit) equity that are excluded from net loss. The Company’s comprehensive loss was equal to net loss for the years ended December 31, 2020 and 2019. Net Loss per Share The Company follows the two-class method to compute net loss per share attributable to common stockholders as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income (losses) for the period to be allocated between common and participating securities based upon their respective rights to share in the earnings as if all income (losses) for the period had been distributed. During periods of loss, there is no allocation required under the two-class method since the participating securities do not have a contractual obligation to fund the losses of the Company. Net loss attributable to common stockholders is equal to the net loss for the period, as adjusted for: (i) cumulative dividends accrued for redeemable convertible preferred stock, whether or not declared, (ii) increases in carrying value recorded for redeemable convertible preferred stock, including accretion on redeemable convertible preferred stock to redemption value for amounts other than cumulative dividends and (iii) gains on the redemptions of redeemable convertible preferred stock. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, which excludes shares of restricted common stock that are not vested. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, after giving consideration to the dilutive effect of potentially dilutive common shares. For purposes of this calculation, outstanding options to purchase shares of common stock, unvested shares of restricted common stock and shares of redeemable convertible preferred stock are considered potentially dilutive common shares. The Company has generated a net loss in all periods presented so the basic and diluted net loss per share attributable to common stockholders are the same as the inclusion of the potentially dilutive securities would be anti-dilutive. 152 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Emerging Growth Company Status The Company is an “emerging growth company” (“EGC”), as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. The Company may take advantage of these exemptions until it is no longer an EGC under Section 107 of the JOBS Act, which provides that an EGC can take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards. The Company has elected to avail itself of the extended transition period and, therefore, while the Company is an EGC it will not be subject to new or revised accounting standards the same time that they become applicable to other public companies that are not EGCs, unless it chooses to early adopt a new or revised accounting standard. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In January 2016, the FASB issued ASU No. 2016-01 , Financial Instruments—Overall (Subtopic 825-10)—Recognition and Measurement of Financial Assets and Financial Liabilities, which has been subsequently amended by ASU No. 2018-03, ASU No. 2019-04, ASU No. 2020-01 and ASU No. 2020-03 (“ASU 2016-01”). The provisions of ASU 2016-01 make targeted improvements to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information, including certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company early adopted ASU 2016-01 effective January 1, 2019. The implementation of this standard had no impact on the Company’s financial position or results of operations. In February 2016, the FASB issued the new leasing standards to increase transparency and comparability among organizations related to their leasing activities. The Company early adopted the new leasing standards effective January 1, 2019. For additional information on the adoption of the new leasing standards, please read the Company’s policy above entitled Leases, and Note 7, Commitments and Contingencies, to these consolidated financial statements. In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) I. Accounting for Certain Financial Instruments with Down Round Features II . Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down-round features. Part II replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. The Company early adopted ASU 2017-11 effective January 1, 2019. The adoption of ASU 2017-11 had no impact on the Company’s financial position or results of operations. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments, which has been subsequently amended by ASU No. 2018-19, ASU No. 2019-04, ASU No. 2019-05, ASU No. 2019-10, ASU No. 2019-11 and ASU No. 2020-03 (“ASU 2016-13”). The provisions of ASU 2016-13 modify the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology and require a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for the Company on January 1, 2023, with early adoption permitted. The Company is currently evaluating the potential impact that this standard may have on its financial position and results of operations, as well as the timing of its adoption of this standard. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes (“ASU 2019-12”), as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax 153 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for the Company on January 1, 2022, with early adoption permitted. The Company is currently evaluating the potential impact that this standard may have on its financial position and results of operations, as well as the timing of its adoption of this standard. 3. Restricted Cash As of December 31, 2020 and 2019, the Company had restricted cash of $ 0.6 million, held as a letter of credit for the benefit of the landlord in connection with the Company’s lease in Cambridge, Massachusetts. The lease term expires on December 30, 2021. Restricted cash was classified within prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2020 as the lease term expires less than twelve months from the consolidated balance sheet date. Restricted cash was classified within other non-current assets on the consolidated balance sheet as of December 31, 2019 . 4. Fair Value of Financial Assets and Liabilities The following tables present information about the Company’s financial assets 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): As of December 31, 2020 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 290,931 $ — $ — $ 290,931 $ 290,931 — — $ 290,931 As of December 31, 2019 Level 1 Level 2 Level 3 Total Assets: Cash equivalents: Money market funds $ 44,429 $ — $ — $ 44,429 $ 44,429 $ — $ — $ 44,429 5. Property and Equipment, Net Property and equipment, net consisted of the following (in thousands): December 31, 2020 2019 Office furniture and equipment $ 113 $ 113 Laboratory equipment 48 48 Computer equipment 9 5 Total property and equipment 170 166 Less: Accumulated depreciation ( 88 ) ( 38 ) Property and equipment, net $ 82 $ 128 Depreciation expense was not significant for the years ended December 31, 2020 and 2019. 154 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2020 2019 Accrued personnel-related expenses $ 5,516 $ 1,059 Accrued external research and development expenses 4,206 1,552 Accrued license fees — 363 Accrued other 1,147 481 Total accrued expenses $ 10,869 $ 3,455 7. Commitments and Contingencies Leases In October 2018, the Company entered into a sublease agreement for office space located in Cambridge, Massachusetts which expires on December 30, 2021, with no option to renew or terminate early. The base rent increases by approximately 1 % annually. The Company issued a letter of credit to the landlord related to the security deposit, secured by restricted cash (Note 3). This lease qualifies as an operating lease. In January 2019, the Company entered into an arrangement with a third party to sublease a portion of its Cambridge, Massachusetts office space. This sublease was terminated in November 2019. The following table summarizes the presentation of the operating lease in the Company’s consolidated balance sheets (in thousands): As of December 31, 2020 2019 Assets: Operating lease right-of-use assets $ 754 $ 1,450 Liabilities: Current operating lease liabilities $ 763 $ 696 Non-current portion of operating lease liabilities — 763 Total lease liabilities $ 763 $ 1,459 The following table summarizes total lease costs recognized in the Company’s consolidated statements of operations and comprehensive loss (in thousands): For the year ended 2020 2019 Operating lease cost $ 782 $ 782 Variable lease costs 14 3 Sublease income — ( 31 ) Total lease costs $ 796 $ 754 155 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Variable lease costs were primarily related to operating expenses, taxes and insurance associated with the operating lease, which were assessed based on the Company’s proportionate share of such costs for the leased premises. As these costs are generally variable in nature, they are not included in the measurement of the operating lease right-of-use asset and related lease liability. Total lease costs are included as operating expenses in the Company’s consolidated statements of operations and comprehensive loss. Future lease payments under non-cancelable lease agreements as of December 31, 2020 were as follows (in thousands): Year Ended December 31, Future Lease Payments 2021 $ 791 Total future lease payments $ 791 Less: interest ( 28 ) Present value of operating lease liabilities $ 763 The weighted average remaining lease term and weighted average incremental borrowing rate of the Company’s operating lease were as follows: As of December 31, 2020 2019 Weighted average remaining lease term (in years) 1.0 2.0 Weighted average incremental borrowing rate 8.0 % 8.0 % Legal Proceedings The Company, from time to time, may be party to litigation arising in the ordinary course of business. The Company was not subject to any legal proceedings during the years ended December 31, 2020 and 2019, and no material legal proceedings are currently pending or threatened. Purchase Orders The Company has agreements with third parties for various services, including services related to research, preclinical and clinical operations and support, for which the Company is not contractually able to terminate for convenience to avoid future obligations to the vendors. Certain agreements provide for termination rights subject to termination fees or wind down costs. Under such agreements, the Company is contractually obligated to make certain payments to vendors, primarily to reimburse them for their unrecoverable outlays incurred prior to cancellation. The actual amounts the Company could pay in the future to the vendors under such agreements may differ from the purchase order amounts due to cancellation provisions. Indemnification Agreements The Company enters into indemnification agreements and agreements containing indemnification provisions in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify, hold harmless, and to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners, in connection with any U.S. patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual upon execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. 8. Redeemable Convertible Preferred Stock 156 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On October, 20 2020, upon the closing of the IPO, all 53,644,314 outstanding shares of the Redeemable Convertible Preferred Stock were converted into 25,067,977 shares of common stock. Pursuant to the terms of the Company's Amended and Restated Certificate of Incorporation, all series of the Redeemable Convertible Preferred Stock outstanding automatically converted into shares of common stock based on each series' respective then-current conversion ratio. As of December 31, 2020, the Company did not have any shares of redeemable convertible preferred stock authorized, issued or outstanding. The redeemable convertible preferred stock on December 31, 2019 consisted of the following (in thousands, except share amounts): As of December 31, 2019 Shares Authorized Preferred Stock Issued and Outstanding Carrying Value Liquidation Preference Redemption Value Common Stock Issuable Upon Conversion Series A Preferred Stock 8,075,799 8,075,799 $ 9,932 $ 9,932 $ 9,932 3,773,820 Series B Preferred Stock 14,913,704 14,913,704 49,969 49,969 49,969 6,969,173 Series B-1 Preferred Stock 2,666,666 2,666,666 10,431 10,431 10,431 1,246,133 Series C Preferred Stock 11,067,963 9,805,827 50,789 50,789 50,789 4,582,257 36,724,132 35,461,996 $ 121,121 $ 121,121 $ 121,121 16,571,383 Common stock issuable upon conversion in the table above represents shares of common stock issuable upon an automatic conversion in the event of a qualified public offering, pursuant to the Company’s then-current Amended and Restated Certificate of Incorporation, effective prior to the completion of the IPO. On June 18, 2019, the Company entered into the Series B-1 Preferred Stock Purchase Agreement which authorized the sale and issuance of up to 2,666,666 shares of its Series B-1 Preferred Stock at a purchase price of $ 3.75 per share. During the year ended December 31, 2019, the Company issued all 2,666,666 shares of Series B-1 Preferred Stock for gross cash proceeds of $ 10.0 million, and incurred an immaterial amount of issuance costs. The issuance of the Series B-1 Preferred Stock resulted in changes to certain rights, preferences and privileges of the Series A Preferred Stock and the Series B Preferred Stock. The Company concluded that such changes were not significant and resulted in a modification, rather than an extinguishment, of the Series A Preferred Stock and the Series B Preferred Stock. The changes to the terms of the Series A Preferred Stock and the Series B Preferred Stock did not result in incremental value to the shareholders, and therefore there was no impact to the accounting for the Series A Preferred Stock and the Series B Preferred Stock. On November 18, 2019, the Company entered into the Series C Preferred Stock Purchase Agreement which authorized the sale and issuance of up to 5,825,243 shares at $ 5.15 per share. On December 10, 2019, the Company executed Amendment No. 1 and Joinder to the Series C Preferred Stock Purchase Agreement which authorized the sale and issuance of an additional 5,242,720 shares at $ 5.15 per share. During the year ended December 31, 2019, the Company issued 9,805,827 shares of Series C Preferred Stock for gross cash proceeds of $ 50.5 million, and incurred issuance costs of $ 0.2 million. Although there were multiple closings of the Series C Preferred Stock, there was no obligation under the initial closing for investors to purchase, or for the Company to sell to such investors, additional shares of Series C Preferred Stock. The issuance of the Series C Preferred Stock resulted in changes to certain rights, preferences and privileges of the Series A Preferred Stock, the Series B Preferred Stock and the Series B-1 Preferred Stock. The Company concluded that such changes were not significant and resulted in a modification, rather than an extinguishment, of the Series A Preferred Stock, the Series B Preferred Stock and the Series B-1 Preferred Stock. The changes to the terms of the Series A Preferred Stock, the Series B Preferred Stock and the Series B-1 Preferred Stock did not result in incremental value to the shareholders, and therefore there was no impact to the accounting for the Series A Preferred Stock, the Series B Preferred Stock and the Series B-1 Preferred Stock. 157 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) On January 20, 2020, the Company granted two investors holding 5,825,243 shares of Series C Preferred Stock that were purchased in December 2019 the option to put their shares back to the Company at the original issuance price. On February 19, 2020 and March 3, 2020, the investors exercised their put option in full via the execution of Stock Redemption and Release Agreements in order to effect the repurchase. Pursuant to the Stock Redemption and Release Agreements, the Company agreed to repurchase a total of 5,825,243 shares of Series C Preferred Stock at the original issuance price of $ 5.15 per share, for an aggregate cash repurchase price of 30.0 million. Under the terms of the Stock Redemption and Release Agreements, the investors waived their right to cumulative dividends that had accumulated from the original issuance date through the date of repurchase. The 5,825,243 shares of Series C Preferred Stock were retired upon repurchase, and subsequently authorized for reissuance pursuant to a waiver to the Company’s Amended and Restated Certificate of Incorporation entered into by the Company and the holders of the Redeemable Convertible Preferred Stock. The Company determined that the additional put right that was granted to the investors represented a modification of the affected shares of Series C Preferred Stock, but that it did not result in incremental value to the shareholders. As there was no incremental value associated with the modification, there was no impact to the accounting for the Series C Preferred Stock. The Company also determined that the put right did not require bifurcation, as it does not contain the characteristics of a derivative instrument. Further, the Company determined that the shares of Series C Preferred Stock that were subject to repurchase did not become mandatorily redeemable until the execution of the Stock Redemption and Release Agreements because the parties did not have an unconditional legal obligation to complete the redemptions until the associated agreements were finalized. Such determination was made in consultation with legal counsel. Accordingly, the Company recorded each of the redemptions on the respective date of repurchase and recognized a gain on repurchase equal to the difference between the repurchase price and the carrying value of the Series C Preferred Stock on the respective date of repurchase. The aggregate gain of $ 0.5 million was recorded upon repurchase as an adjustment to accumulated deficit in the statement of redeemable convertible preferred stock and stockholders’ deficit. The gain relates exclusively to the dividends accrued on the repurchased shares, which were waived by the investors as part of the Stock Redemption and Release Agreements. On April 15, 2020 and May 8, 2020, the Company completed additional closings for the sale and issuance of its Series C Preferred Stock for a total of 4,563,108 shares at $ 5.15 per share for aggregate cash proceeds of $ 23.5 million, less an immaterial amount of issuance costs. On July 24, 2020, the Company entered into the Series C-1 Preferred Stock Purchase Agreement, which authorized the sale and issuance of up to 19,444,453 shares of its Series C-1 Preferred Stock at a purchase price of $ 5.67 per share. During the year ended December 31, 2020, the Company issued all 19,444,453 shares of Series C-1 Preferred Stock for gross cash proceeds of $ 110.3 million, and incurred issuance costs of approximately $ 0.2 million. Although there were multiple closings of the Series C-1 Preferred Stock, there was no obligation under the initial closing for investors to purchase, or for the Company to sell to such investors, additional shares of Series C-1 Preferred Stock. The issuance of the Series C-1 Preferred Stock resulted in changes to certain rights, preferences and privileges of the Series A Preferred Stock, the Series B Preferred Stock, the Series B-1 Preferred Stock and the Series C Preferred Stock. The Company concluded that such changes were not significant and resulted in a modification, rather than an extinguishment, of the previously outstanding Redeemable Convertible Preferred Stock. The changes to the terms of the Series A Preferred Stock, the Series B Preferred Stock, the Series B-1 Preferred Stock and the Series C Preferred Stock did not result in incremental value to the shareholders, and therefore there was no impact to the accounting for the previously outstanding Redeemable Convertible Preferred Stock. Rights, Preferences and Privileges Prior to the conversion of the Redeemable Convertible Preferred Stock into shares of common stock upon the completion of the IPO on October 20, 2020, the holders of the Redeemable Convertible Preferred Stock had the following rights, preferences and privileges: Voting Rights The holders of outstanding shares of the Redeemable Convertible Preferred Stock were entitled to vote, together with the holders of common stock, on all matters submitted to the stockholders for a vote, and were entitled 158 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) to the number of votes equal to the number of whole shares of common stock into which such holders of the Redeemable Convertible Preferred Stock could convert on the record date for determining stockholders entitled to vote. Except for the actions requiring the approval or consent of the majority of the holders of the Redeemable Convertible Preferred Stock, the holders of the Redeemable Convertible Preferred Stock would vote together with the holders of common stock and vote as a single class. The holders of the Series A Preferred Stock, exclusively and as a separate class, were entitled to elect two directors of the Company. The holders of the Series B Preferred Stock and Series B-1 Preferred Stock, exclusively and together as a separate class, were entitled to elect two directors of the Company. The holders of common stock and of any other class or series of voting stock (including the Redeemable Convertible Preferred Stock), exclusively and voting as a single class, were entitled to elect the balance of total number of directors of the Company. Dividends The holders of the Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock were entitled to accrue cumulative dividends at an annual rate of $ 0.08 , $ 0.24 , $ 0.30 , $ 0.412 and $ 0.4536 per share, respectively, subject to adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Redeemable Convertible Preferred Stock. Dividends accrued from day to day whether or not declared by the Board, and were payable only when, as, and if declared by the Board. No dividends were declared or paid by the Company on the Redeemable Convertible Preferred Stock. The Company’s cumulative dividends on its Redeemable Convertible Preferred Stock as of December 31, 2019 were as follows (in thousands): Series A Preferred Stock $ 1,857 Series B Preferred Stock 5,228 Series B-1 Preferred Stock 431 Series C Preferred Stock 289 $ 7,805 No dividends could be declared, paid or set aside to any other class or series of capital stock (other than dividends on shares of common stock payable in common stock) unless, in addition to obtaining any consents otherwise required in the Company’s Amended and Restated Certificate of Incorporation, the holders of the Redeemable Convertible Preferred Stock first received a dividend on each outstanding share in an amount at least equal to the greater of: (i) all accrued and unpaid dividends and (ii) in the case of a dividend being distributed to common stock or any class or series of capital stock that is convertible into common stock, the equivalent dividend on an as-converted basis or (iii) in the case of a dividend being distributed on a series or class not convertible into common stock, an additional dividend equal to a dividend rate calculated based on the respective original issue price of the Preferred Stock. The original issue price per share was equal to $ 1.00 for the Series A Preferred Stock, $ 3.00 for the Series B Preferred Stock, $ 3.75 for the Series B-1 Preferred Stock and $ 5.15 for the Series C Preferred Stock. The holders of the Series C Preferred Stock, Series B Preferred Stock and Series B-1 Preferred Stock were entitled to receive dividends prior to any dividends on the Series A Preferred Stock. Liquidation Rights In the event of any voluntary or involuntary liquidation event, dissolution, winding up of the Company or upon the occurrence of certain events designated by a majority of the holders of the Redeemable Convertible Preferred Stock, and at least two out of three specific holders, to be a deemed liquidation event, each holder of the then outstanding Series C-1 Preferred Stock, Series C Preferred Stock, Series B-1 Preferred Stock and Series B Preferred Stock was entitled to receive, prior and in preference to any distributions to the holders of Series A Preferred Stock and common stock, an amount equal to the greater of (i) original issuance price (adjusted in the event of any stock dividend, stock split, combination or other similar activity) plus any cumulative accrued dividends, whether or not declared, with any other dividends declared but unpaid thereon, or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event. 159 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) After the payment of all preferential amounts to the holders of the Series C-1 Preferred Stock, Series C Preferred Stock, Series B-1 Preferred Stock and Series B Preferred Stock, each holder of the then outstanding Series A Preferred Stock was entitled to receive, prior and in preference to any distributions to the holders of common stock, an amount equal to the greater of (i) original issuance price (adjusted in the event of any stock dividend, stock split, combination or other similar activity) plus any cumulative accrued dividends, whether or not declared, with any other dividends declared but unpaid thereon, or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event. After payments have been made in full to the holders of the Redeemable Convertible Preferred Stock, then, to the extent available, the remaining amounts would be distributed among the holders of the shares of common stock, pro rata based on the number of shares held by each holder. Conversion Each share of the Redeemable Convertible Preferred Stock was convertible, at any time, at the option of the holder, and without the payment of additional consideration, into such shares of non-assessable shares of common stock as is determined by dividing the original issue price by the applicable conversion price in effect at the time of conversion. The applicable conversion price for the Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock was initially equal to $ 2.14 , $ 6.42 , $ 8.03 , $ 11.02 and $ 12.13 , respectively, as adjusted for the Company's reverse stock split. Each share of the Redeemable Convertible Preferred Stock would automatically convert into common stock at the applicable conversion ratio then in effect for each series of the Redeemable Convertible Preferred Stock upon either (i) the closing of the sale of shares of common stock at a price of at least $ 10.30 per share in a firm-commitment underwritten public offering pursuant to an effective registration statement resulting in at least $ 75.0 million of gross proceeds and the listing of the Company’s common stock on the New York Stock Exchange, The Nasdaq Global Select Market, or The Nasdaq Global Market or (ii) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of a majority of the outstanding Redeemable Convertible Preferred Stock, voting together as a single class and at least two of three specific holders. As of December 31, 2019, each share of the Redeemable Convertible Preferred Stock was convertible into 0.4673 shares of common stock, as adjusted for the Company's reverse stock split. Upon conversion pursuant to the completion of the IPO, the applicable conversion price for the Series A Preferred Stock, Series B Preferred Stock, Series B-1 Preferred Stock, Series C Preferred Stock and Series C-1 Preferred Stock was equal to $ 2.14 , $ 6.42 , $ 8.03 , $ 11.02 and $ 12.13 , respectively, as adjusted for the Company’s reverse stock split. Accordingly, each share of the Redeemable Convertible Preferred Stock converted into approximately 0.4673 shares of common stock. Redemption Each series of the Redeemable Convertible Preferred Stock was redeemable at a price equal to the applicable original issuance price per share (adjusted in the event of any stock dividend, stock split, combination or other similar activity), plus any cumulative accrued dividends, whether or not declared together with any other dividends declared but unpaid, in three annual installments commencing not more than 60 days on or after July 24, 2025 at the written election of at least a majority of the holders of the Redeemable Convertible Preferred Stock voting together as a single class and at least two out of three specific parties. 9. Common Stock and Preferred Stock Common Stock On October 20, 2020, the Company completed its IPO, pursuant to which it issued and sold 11,500,000 shares of its common stock at a public offering price of $ 19.00 per share, including 1,500,000 shares of common stock issued and sold pursuant to the underwriters’ exercise of their option to purchase additional shares of common stock. The IPO resulted in net proceeds of $ 200.3 million, after deducting underwriting discounts and commissions and other offering expenses. Upon the closing of the IPO, all 53,644,314 outstanding shares of the Redeemable Convertible Preferred Stock automatically converted into 25,067,977 shares of common stock pursuant to the terms of the Company's Amended and Restated Certificate of Incorporation at the then-current conversion ratio for each series, as adjusted for the Company's reverse stock split. 160 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2020, the authorized capital stock of the Company included 150,000,000 shares of common stock, $ 0.0001 par value, pursuant to the Amended and Restated Certificate of Incorporation effective upon the completion of the IPO. Holders of such shares of common stock have the exclusive right to vote for the election of the Company's directors and are entitled to one vote per share. In the event of the voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to a pro rata distribution of the Company's net assets. Dividends may be declared and paid to such holders only when, as, and if declared by the Board or an authorized committee thereof. As of December 31, 2019, the authorized capital stock of the Company included 46,000,000 shares of common stock, $ 0.0001 par value. Such holders had rights, preferences and privileges subject to and qualified by the rights, preferences and privileges of the Redeemable Convertible Preferred Stock. Such holders of common stock were entitled to one vote per share, together with the holders of the Redeemable Convertible Preferred Stock, on all matters submitted to the stockholders for a vote, and were not entitled to receive dividends. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, after the payment of preferential amounts required to be paid to the holders of the Redeemable Convertible Preferred Stock, the holders of common stock were entitled to a pro rata distribution of the Company's remaining assets based on the number of shares held by each such holder. As of December 31, 2020, the Company did no t hold any treasury shares. Shares Reserved for Future Issuance The Company had reserved the following shares of common stock for future issuance: December 31, 2020 2019 Shares reserved for exercise of outstanding stock options 5,944,546 1,634,686 Shares reserved for future awards under the 2020 Stock Option and Incentive Plan 3,036,776 — Shares reserved for future awards under the 2020 Employee Stock Purchase Plan 327,102 — Shares reserved for future awards under the 2017 Stock Incentive Plan — 617,101 Series A Preferred Stock — 3,773,820 Series B Preferred Stock — 6,969,173 Series B-1 Preferred Stock — 1,246,133 Series C Preferred Stock — 4,582,257 Shares reserved for vesting of restricted stock — 48,190 Total shares of authorized common stock reserved for future issuance 9,308,424 18,871,360 Preferred Stock As of December 31, 2020, the Company was authorized to issue 10,000,000 shares of undesignated preferred stock, $ 0.0001 par value, in one or more series, and is authorized to fix the powers, designations, preferences and relative participating option or other rights thereof, including dividend rights, conversion rights, voting rights, redemption rights, liquidation preferences and the number of shares constituting any series, without any further vote or action by the Company's shareholders. The Company was not authorized to issue any such shares as of December 31, 2019. As of December 31, 2020, the Company had no shares of undesignated preferred stock issued or outstanding. 161 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Stock-Based Compensation 2020 Stock Option and Incentive Plan On September 9, 2020, the Board approved the 2020 Stock Option and Incentive Plan (the "2020 Plan"), which was subsequently approved by its stockholders and became effective on October 15, 2020. The 2020 Plan replaced the 2017 Stock Incentive Plan (the "2017 Plan") and no additional awards will be granted under the 2017 Plan following the closing of the IPO. The 2017 Plan will continue to govern outstanding equity awards granted thereunder. The 2020 Plan allows the Company to grant stock options, restricted stock, restricted stock units and other stock-based awards to officers, employees, directors and consultants. The 2020 Plan is administered by the Compensation Committee of the Board, which has the authority to grant awards, to accelerate at any time the exercisability or vesting of any award and to determine the specific terms and conditions of each award, subject to the provisions of the 2020 Plan. The total number of shares of common stock authorized for issuance under the 2020 Plan as of December 31, 2020 was 3,271,028 shares. There were no shares of common stock authorized for issuance under the 2020 Plan as of December 31, 2019. As of December 31, 2020, the Company had issued only stock options under the 2020 Plan. Stock options issued comprise service-based awards granted to employees. Stock options issued under the 2020 Plan typically have vesting conditions in which 25 % vests upon the first anniversary of a specified vesting commencement date, and the remaining 75 % vests in 36 monthly installments over the remaining three years . Vesting of stock options is subject to the recipient’s continued employment or service. Stock options issued under the 2020 Plan expire 10 years from the date of grant. Shares that expire, are terminated, surrendered or canceled under the 2020 Plan without having been fully exercised will be available for future awards. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock available for future awards. Upon stock option exercise, the Company issues new shares and delivers them to the participant. 2017 Stock Incentive Plan On May 9, 2017, the Board adopted the 2017 Plan. The 2017 Plan allows the Company to grant stock options, restricted stock, restricted stock units and other stock-based awards to employees, officers, directors, consultants and advisors of the Company. The 2017 Plan is administered by the Board, which has the authority to grant awards and determine the terms of awards under the 2017 Plan, provided that generally the exercise price per share of stock options granted may not be less than 100% of the fair market value of a share of the Company’s common stock on the date of grant, and the term of stock options granted may not exceed ten years . The total number of shares of common stock authorized for issuance under the 2017 Plan as of December 31, 2020 and 2019 was 5,937,763 shares and 2,356,927 shares, respectively. Any authorization to issue new options under the 2017 Plan was cancelled upon the effectiveness of the 2020 Plan and no further awards will be granted under the 2017 Plan. As of December 31, 2020 and 2019, the Company had issued only stock options and restricted stock under the 2017 Plan. Stock options issued comprise service-based awards granted to employees, directors and non-employee consultants. Stock options and restricted stock issued under the 2017 Plan typically have vesting conditions in which 25 % vests upon the first anniversary of a specified vesting commencement date, and the remaining 75 % vests in 36 monthly installments over the remaining three years . Vesting of stock options is subject to the recipient’s continued employment or service. The Company has the right to repurchase any unvested shares of restricted stock held by a recipient during the vesting period if the relationship between the recipient and the Company has terminated. Stock options issued under the 2017 Plan expire ten years from the date of grant. Shares that expire, are terminated, surrendered or canceled under the 2017 Plan without having been fully exercised will be available for future awards under the 2020 Plan. In addition, shares of common stock that are tendered to the Company by a participant to exercise an award are added to the number of shares of common stock 162 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) available for future awards. Upon stock option exercise, the Company issues new shares and delivers them to the participant. 2020 Employee Stock Purchase Plan On September 9, 2020, the Board approved the 2020 Employee Stock Purchase Plan (the "2020 ESPP"), which was subsequently approved by its stockholders and became effective on October 15, 2020. The 2020 ESPP permits employees whose customary employment is for more than 20 hours per week to purchase common stock through payroll deductions (which cannot exceed 15 percent of each employee's compensation) at the lower of 85 percent of fair market value at the beginning of the purchase period or the end of each purchase period. The Company may make one or more offerings each year to its employees to purchase shares under the 2020 ESPP. Offerings will usually begin on or around each May 1 and November 1 and will continue for six-month periods, referred to as offering periods. During the year ended December 31, 2020, there were no shares purchased under the 2020 ESPP as the first offering period had not opened as of December 31, 2020. The total shares authorized for issuance under the 2020 ESPP were 327,102 shares as of December 31, 2020. There were no shares authorized for issuance under the 2020 ESPP as of December 31, 2019. Restricted Common Stock Prior to the adoption of the 2017 Plan, the Company granted restricted common stock in 2016 with time-based vesting conditions to certain employees and non-employee founders of the Company pursuant to individual award agreements. The restricted common stock granted pursuant to these agreements vests either: (i) 25 % upon vesting commencement or the first anniversary of a specified vesting commencement date, and the remaining 75 % monthly over 36 months thereafter, (ii) monthly over 48 months after a specified vesting commencement date, or (iii) monthly over 12 months from a specified vesting commencement date. The Company had the right to repurchase the unvested shares held by a recipient during the vesting period if the relationship between the recipient and the Company has terminated. Shares of restricted common stock are not accounted for as outstanding common stock until they have vested. Unvested shares of restricted common stock may not be sold or transferred by the holder. All granted restricted common stock had vested as of December 31, 2020. The Company did not grant any restricted common stock during the years ended December 31, 2020 and 2019. The following table summarizes all of the Company’s restricted common stock activity, including restricted common stock issued under the 2017 Plan and under individual award agreements prior to the adoption of the 2017 Plan: Shares Weighted Average Grant Date Fair Value Unvested as of December 31, 2019 48,190 $ 0.06 Issued — — Vested ( 48,190 ) 0.06 Repurchased — — Unvested as of December 31, 2020 — $ — The total fair value of restricted common stock that vested during the years ended December 31, 2020 and 2019 was $ 0.5 million and $ 0.6 million, respectively. 163 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock Options The following table summarizes the Company’s stock option activity: Number of Shares Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (In years) (In thousands) Outstanding as of December 31, 2019 1,634,686 $ 2.46 Granted 4,529,870 9.10 Exercised ( 30,496 ) 2.87 $ 696 Cancelled or Forfeited ( 189,514 ) 4.00 Outstanding as of December 31, 2020 5,944,546 $ 7.47 9.19 $ 282,686 Exercisable as of December 31, 2020 1,017,306 $ 2.31 7.85 $ 53,624 Vested and expected to vest as of December 31, 2020 5,794,877 $ 7.47 9.19 $ 275,562 The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the underlying stock options and the estimated fair value of the Company’s common stock for those stock options that had exercise prices lower than the estimated fair value of the Company’s common stock at December 31, 2020. Stock Option Valuation The weighted-average assumptions that the Company used in the Black-Scholes option pricing model to determine the grant-date fair value of stock options granted to employees, members of the Board and non-employees on the date of grant were as follows: Year Ended December 31, 2020 2019 Risk-free interest rate 0.47 % 1.55 % Expected term (in years) 6.20 6.00 Expected volatility 85.94 % 79.09 % Expected dividend yield — % — % The weighted-average grant-date fair value of the Company’s stock options granted during the years ended December 31, 2020 and 2019 was $ 6.51 and $ 2.25 , respectively. In December 2020, the Company recognized approximately $ 2.1 million of stock-based compensation expense, recorded within general and administrative expense, related to the modification of option awards granted to former employee in conjunction with their termination of employment. The former employee will continue to vest in 53,319 option awards through September 2021. Stock-Based Compensation Stock-based compensation expense was allocated as follows (in thousands): Year Ended December 31, 2020 2019 Research and development $ 1,357 $ 430 General and administrative 3,854 238 Total stock-based compensation expense $ 5,211 $ 668 164 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2020, total unrecognized compensation cost related to unvested stock-based awards was $ 26.7 million, which is expected to be recognized over a weighted-average period of 3.58 years. 11. Significant Agreements Purdue License Agreement On December 31, 2017, the Company entered into a License Agreement with Purdue (the “Purdue License Agreement”), pursuant to which Purdue granted the Company exclusive rights under certain Purdue know-how to research, develop and commercialize pharmaceutical products concerning a GABA A positive allosteric modulator. The Company is obligated to make future milestone payments based on the achievement of specified development and sales milestones up to $ 33.0 million. Furthermore, the Company is required to pay Purdue royalties of a low-single-digit percentage of annual net sales of licensed products. The Purdue License Agreement will remain in effect until the expiration of the Company’s royalty obligation for all licensed products. Either the Company or Purdue may terminate the agreement in the event of a material breach by the other party and fails to cure such breach within a certain period of time. Either party may voluntarily terminate the agreement with prior notice. If the agreement is voluntarily terminated by Purdue, the Company’s license rights will survive such termination and such rights will become fully paid, perpetual and irrevocable. As of December 31, 2020, none of the developmental or sales milestones under the Purdue License Agreement were achieved. RogCon and Ionis Agreements During 2018, the Company began negotiating a license agreement with RogCon Inc. (“RogCon”) for intellectual property related to treating SCN2A mutations in epilepsy, which is recognized as the second most common genetic cause of epilepsy. RogCon had an existing collaboration with Ionis Pharmaceuticals, Inc. (“Ionis”) and as a result the Company needed to negotiate an agreement with Ionis in order to complete the license agreement with RogCon. On December 21, 2018, the Company entered into an agreement with RogCon to advance RogCon a deposit of up to $ 1.0 million on the pending license agreement while the agreement with Ionis was being negotiated. The deposit was fully refundable to the Company. On September 11, 2019, the Company entered into both a Cooperation and License Agreement (the “License Agreement”) with RogCon, and a Research, Collaboration, Option and License Agreement (the “Collaboration Agreement”) with Ionis. The agreements were entered into contemporaneously to enable the parties to advance their collective efforts related to SCN2A. Upon execution of the License Agreement, the $ 1.0 million outstanding balance of the deposit was applied toward the purchase price of the License Agreement. RogCon Agreement Under the License Agreement, RogCon granted to the Company an exclusive, worldwide license under RogCon’s intellectual property to research, develop and commercialize products for the treatment of all forms of epilepsy and/or neurodevelopmental disorders in each case caused by any mutation of the SCN2A gene. Under the License Agreement, the Company will conduct, at its own cost and expense, the research and development activities assigned to it under the research plan. In addition, the Company is responsible for reimbursing RogCon for any costs associated with research and development activities RogCon performs at the request of the Company. As part of the agreement, the Company agreed to provide up-front consideration of $ 2.1 million, consisting of the $ 1.0 million deposit, $ 0.7 million in cash reimbursements for certain historical costs previously incurred by RogCon, and $ 0.4 million for the retirement of existing loan balances as of September 11, 2019. The Company concluded that the License Agreement represented the acquisition of in-process research and development assets with no alternative future use. Therefore, the aggregate acquisition cost of $ 2.2 million, consisting of the $ 2.1 million of up-front consideration and $ 0.1 million of acquisition costs, was expensed as research and development on September 11, 2019. Subsequent to September 11, 2019, the Company will reimburse RogCon for its out-of-pocket costs incurred for activities performed under the License Agreement. The Company expenses these costs as incurred as research 165 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) and development. The Company expensed $ 0.2 million and $ 0.1 million for the reimbursement of RogCon’s out-of-pocket costs in the years ended December 31, 2020 and 2019, respectively. Additionally, the Company may pay RogCon a milestone payment of $ 3.0 million and profit share payments. The $ 3.0 million milestone payment will become due when the first profit share payment has become due and certain contingent payments have become payable to Ionis under the Collaboration Agreement, which are subject to the Company exercising its option to obtain license rights to a development candidate, as well as other contingent events. The profit share payments will be based on a low-double-digit percentage of net profits, depending on sales volume. The License Agreement, unless earlier terminated, will continue until the latest of: (i) expiration of all patent rights within RogCon patents, (ii) the Company and its affiliates certify they have abandoned the research, development and commercialization of product with no intention to re-establish such activities, and (iii) no third party is obligated to pay the Company or its affiliates any amounts that comprise net sublicense revenue. Either party may terminate the License Agreement for material breach or insolvency of the other party. Additionally, the Company may terminate for convenience with prior written notice to RogCon. Upon termination by either party, all rights and licenses granted by RogCon to the Company will revert back to RogCon. Ionis Collaboration Agreement Under the Collaboration Agreement, both parties will participate in research activities related to the downregulation of SCN2A gene products associated with the treatment of any and all forms of epilepsy and/or neurodevelopmental disorders in each case caused by any mutation of the SCN2A gene, other than one severe type of epilepsy. Ionis will also be responsible for identifying a development candidate and conducting an IND-enabling toxicology study. The Company will reimburse Ionis for any out-of-pocket costs incurred related to the research activities, identification of a development candidate and conducting an IND-enabling toxicology study. Additionally, the Company agreed to reimburse $ 0.3 million of costs incurred by Ionis for the performance of research activities prior to the execution of the Collaboration Agreement, which the Company recognized as research and development expense. The reimbursement of out-of-pocket costs is recognized as research and development expense as incurred. The Company expensed a total of $ 1.7 million and $ 0.6 million, inclusive of the upfront payment of $ 0.3 million, as research and development expense under the Collaboration Agreement for the years ended December 31, 2020 and 2019, respectively. Ionis granted the Company an exclusive option to obtain the rights and license related to the development candidate, which the Company may exercise following completion of the IND-enabling toxicology study. Upon option exercise, the Company will pay Ionis a $ 2.0 million license fee. After option exercise, the Company is responsible for clinical development and commercialization of the development candidate. If the option is not exercised, the Collaboration Agreement will expire, and the Company will have no further rights to the development candidate. Additionally, if the option is not exercised, at the request of Ionis, the Company will assign the RogCon License Agreement to Ionis. The Company concluded that there is no accounting recognition for the exclusive option unless and until such option is exercised because it is a unilateral right of the Company that is priced at an amount that approximates fair value. If the Company exercises its exclusive option, Ionis may be entitled to development milestone payments, additional milestone payments, and sales royalties or sublicense fees. The Collaboration Agreement will continue until the expiration of all payment obligations to Ionis, unless earlier terminated. Either party may terminate the Collaboration Agreement upon material breach or insolvency of the other party or if Ionis is unable to identify a development candidate. Ionis may terminate if the Company fails to achieve a performance milestone. The Company may terminate for convenience with prior written notice to Ionis. Upon termination by the Company for convenience, the Company will stop selling all products, subject to certain wind-down provisions, and all products will revert back to Ionis. 12. Net Loss per Share 166 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share data): Years Ended December 31, 2020 2019 Numerator: Net loss $ ( 61,820 ) $ ( 35,512 ) Accretion and cumulative dividends on redeemable convertible preferred stock ( 8,996 ) ( 5,170 ) Gain on repurchase of redeemable convertible preferred stock 493 — Net loss attributable to common stockholders $ ( 70,323 ) $ ( 40,682 ) Denominator: Weighted average common shares outstanding, basic and diluted 8,950,152 1,529,629 Net loss per share attributable to common stockholders, basic and diluted $ ( 7.86 ) $ ( 26.60 ) The following potential common shares, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have been anti-dilutive: Year Ended December 31, 2020 2019 Outstanding stock options 5,944,546 1,634,686 Series A Preferred Stock — 3,773,820 Series B Preferred Stock — 6,969,173 Series B-1 Preferred Stock — 1,246,133 Series C Preferred Stock — 4,582,257 Unvested restricted common stock — 48,190 5,944,546 18,254,259 The shares of common stock issuable upon conversion of the Redeemable Convertible Preferred Stock for the year ended December 31, 2019 assumed automatic conversion in the event of a qualified public offering. 13. Income Taxes The Company maintains a full valuation allowance on its U.S. net deferred tax assets due to the uncertainty of future taxable income. The Company did not recognize an income tax benefit in the years ended December 31, 2020 or 2019 related to its U.S. operations due to the uncertainty regarding future taxable income. In the years ended December 31, 2020 and 2019, the difference between the statutory tax rate in the U.S. and the Company’s effective tax rate was due primarily to the valuation allowance recorded to offset any potential tax benefit. The income tax benefit recognized for the years ended December 31, 2020 and 2019 related to income tax associated with the Company’s operations in Australia. 167 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows: Year Ended December 31, 2020 2019 Federal statutory income tax rate 21.0 % 21.0 % State taxes, net of federal benefit 5.6 % 6.0 % Federal and state research and development credits 2.9 % 2.9 % Non-deductible items ( 1.8 ) % ( 0.4 ) % Foreign 0.2 % 0.2 % Change in valuation allowance ( 27.9 ) % ( 29.6 ) % Other — % 0.1 % Effective income tax rate — % 0.2 % Net deferred tax assets consisted of the following (in thousands): December 31, 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 26,441 $ 14,502 Amortization 5,774 3,512 Research and development credits 3,053 1,230 Accrued expenses 1,433 340 Leases 207 396 Stock-based compensation 170 60 Total gross deferred tax assets $ 37,078 $ 20,040 Less: Valuation allowance ( 36,873 ) ( 19,647 ) Net deferred tax assets $ 205 $ 393 Deferred tax liabilities: Operating lease right-of-use asset ( 205 ) ( 393 ) Total gross deferred tax liabilities ( 205 ) ( 393 ) Net deferred tax assets $ — $ — As of December 31, 2020 and 2019, the Company had U.S. federal net operating loss carryforwards which may be able to offset future income tax liabilities of approximately $ 97.1 million and $ 53.4 million, respectively. Federal net operating loss carryforwards of $ 7.7 million will expire at various dates through 2037 and approximately $ 89.4 million may be carried forward indefinitely. As of December 31, 2020 and 2019, the Company also had state net operating loss carryforwards of approximately $ 94.5 million and $ 52.0 million, respectively, which may be available to offset future income tax liabilities and expire at various dates through 2040. As of December 31, 2020 and 2019, the Company had federal research and development tax credit carryforwards of approximately $ 2.4 million and $ 0.9 million, respectively, available to reduce future tax liabilities which expire at various dates through 2040. As of December 31, 2020 and 2019, the Company had state research and development tax credit carryforwards of approximately $ 0.9 million and $ 0.4 million, respectively, available to reduce future tax liabilities which expire at various dates through 2035. The Company has generated research credits but has not conducted a study to document the qualified activity. This study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed, and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has 168 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) been provided against the Company’s research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance. Under the provisions of the Internal Revenue Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has not conducted a study to assess whether a change of control has occurred or whether there have been multiple changes of control since inception due to the significant complexity and cost associated with such a study. If the Company has experienced a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. Further, until a study is completed by the Company and any limitation is known, no amounts are being presented as an uncertain tax position. ASC 740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all of the evidence, both positive and negative, the Company has recorded a valuation allowance against its deferred tax assets at December 31, 2020 and 2019 because management has determined that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets, primarily due to its history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception. As a result, a valuation allowance of $ 36.9 million and $ 19.6 million has been established at December 31, 2020 and 2019, respectively. Management reevaluates the positive and negative evidence at each reporting period. The valuation allowance increased by approximately $ 17.3 million and $ 10.5 million during the years ended December 31, 2020 and 2019, respectively, due primarily to the generation of net operating losses. The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2020 and 2019. The Company’s policy is to record interest and penalties related to uncertain tax positions as part of its income tax provision. As of December 31, 2020 and 2019, the Company had no accrued interest or penalties related to uncertain tax positions and no such amounts have been recognized in the Company’s consolidated statement of operations and comprehensive loss for either year ended December 31, 2020 or 2019. The statute of limitations for federal and state tax authorities is open for tax years ended December 31, 2017 through December 31, 2020. Since the Company is in a net loss carryforward position, the Company is generally subject to examination by the U.S. federal, state and local income tax authorities for all tax years in which a loss carryforward is available. 14. Related Party Transactions One of the founders of RogCon became the Company's General Counsel in June 2020. During the years ended December 31, 2020 and 2019, the Company reimbursed RogCon for its out-of-pocket costs incurred for activities performed under the License Agreement (Note 11). A former member of the Board was affiliated with Purdue through September 2020. During the years ended December 31, 2020 and 2019, the Company performed certain research and development activities pursuant to the Purdue License Agreement (Note 11). During the years ended December 31, 2020 and 2019, related parties participated in each of the 169 Table of Contents PRAXIS PRECISION MEDICINES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Company’s offerings of the Redeemable Convertible Preferred Stock (Note 8). During the year ended December 31, 2019, the Company reimbursed $ 0.2 million of third-party recruiting costs incurred by a significant shareholder on behalf of the Company. These amounts were recorded in general and administrative expenses during the year ended December 31, 2019 and were within accrued expenses as of December 31, 2019. 15. Employee Benefit Plan The Company has a defined contribution savings plan under Section 401(k) of the Internal Revenue Code for eligible employees. The plan covers substantially all employees who meet a minimum age requirement and allows participants to defer a portion of their annual compensation on a pre-tax basis. Under the plan, the Company is not obligated to match any participant contributions. The Company made contributions of $ 0.5 million during the year ended December 31, 2020 and did no t make any contributions to the plan during the year ended December 31, 2019. 16. Subsequent Events The Company has completed an evaluation of subsequent events after the consolidated balance sheet date of December 31, 2020 through the date these consolidated financial statements were issued. The Company has concluded that no subsequent events have occurred that require disclosure . 170 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures None.