What changed in this filing

/stocks — the workspaceLOADING

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-03-01 compared with 2020-03-16 · 309 added, 232 removed, 519 unchanged (51% of the section changed)

Quantitative and Qualitative Disclosures About Market Risk.

Not required as a smaller reporting company.

Financial Statement s and Supplemen tary Data.

We are exposed to market risk in the ordinary course of our business.

Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.

Our market risk exposure is primarily a result of fluctuations in interest rates, and to a lesser extent, foreign currency exchange rates.

We do not hold or issue financial instruments for trading purposes.

Financial Statement s and Supplementary Data.

Cortexyme, Inc.

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Notes to Financial Statements

REPORT OF INDEPENDENT REGIST ERED PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

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We have audited the accompanying balance sheets of Cortexyme, Inc.

(the “Company”) as of December 31, 2019 and 2018, the related statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows the years then ended , in conformity with accounting principles generally accepted in the United States of America.

(the “Company”) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 , in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2021 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of the Accounting Standards Codification Topic 842, “Leases.”

As discussed in Note 2 to the financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of the Accounting Standards Codification Topic 842, “Leases.”

Basis for Opinion

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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.

We are a public accounting firm registered with the 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.

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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.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for prepaid and accrued clinical trial expenses

As disclosed in Note 2 to the financial statements, the Company expenses research and development costs as incurred, which include costs relating to clinical trial activities.

E xpenses related to clinical trial studies are based on estimates of the services received and efforts expended pursuant to contracts with each of the Contract Research Organizations (“CROs”) and investigative sites .

Tracking the progress of the clinical trials, including payments made by the Company and by the CROs, allows the Company to record the appropriate expense, prepayments, and accruals under the terms of the agreements.

As described in Note 5 to the financial statements, the Company recorded prepaid research and development expenses and accrued research and development expenses of $2,110,000 and $10,603,000 as of December 31, 2020, respectively, which includes prepayment and accrual for clinical trial expenses.

We identified the auditing of the Company’s prepaid and accrued clinical trial expenses as a critical audit matter.

When estimating prepaid and accrued clinical trial expenses, the Company considers several factors including clinical trial budgets, contract amendments, the high volume of data received from the investigative sites and CROs to determine progress toward completion, and payments made.

Additionally, due to the long duration of clinical trials and the timing of invoicing received from CROs and investigative sites, the actual amounts incurred are not typically known at the time the financial statements are issued.

Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters.

The primary procedures we performed to address this critical audit matter included:

Testing management’s process for estimating prepayment or accrual of clinical trial expenses and evaluating the appropriateness of the method used by management to develop its assumptions.

Testing the clinical trial expenses by confirming progress with CROs.

Testing the completeness and accuracy of the underlying data received from the investigative sites used in determining the clinical trial expenses, including corroborating against executed agreements, invoices with the investigative sites and information communicated by the CROs.

Recalculating the estimated prepaid or accrued clinical trial expenses based on the Company’s assumptions.

Testing a sample of transactions by comparing the costs against the related invoices and agreements in addition to testing a sample of payments subsequent to the year end to evaluate the completeness of clinical trial accruals.

/s/ BDO USA, LLP

March 16, 2020

We have served as the Company's auditor since 2018.

San Jose, California

March 1, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors

Cortexyme, Inc.

South San Francisco, California

Opinion on Internal Control over Financial Reporting

We have audited Cortexyme Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the balance sheets of the Company as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated March 1, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”.

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

San Jose, California

March 1, 2021

CORTEXYME, INC.

BALANCE SHEETS

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Long term investments

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND

STOCKHOLDERS’ EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

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Total current liabilities

Long-term operating lease liability

Total liabilities

Commitments and contingencies (See Note 7)

Series A redeemable convertible preferred stock, par value $0.001, no shares authorized,

issued and outstanding as of December 31, 2019 and 9,008,931 shares authorized,

9,008,919 shares issued and outstanding as of December 31, 2018;

liquidation preference

of $0 and $17,178 at December 31, 2019 and 2018, respectively

Series B redeemable convertible preferred stock, par value $0.001, no shares authorized,

issued and outstanding as of December 31, 2019 and 9,430,145 shares authorized,

9,152,108 shares issued and outstanding as of December 31, 2018;

liquidation preference

of $0 and $87,972 at December 31, 2019 and 2018, respectively

Stockholders’ equity (deficit):

Stockholders’ equity:

Preferred stock, $0.001 par value, 10,000,000 authorized, no shares issued and

outstanding December 31, 2019 and no shares authorized, issued and

outstanding at December 31, 2018

Common stock, $0.001 par value, 100,000,000 and 24,794,114 shares authorized,

outstanding as of December 31, 2020 and 2019, respectively

Common stock, $0.001 par value, 100,000,000 shares authorized,

29,543,222 and 26,869,413 issued and outstanding as of December 31, 2020 and

2019, respectively

Additional paid in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Accumulated deficit

Total stockholders’ equity (deficit)

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

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to the financial statements

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(in thousands except for share and per share amounts)

Years Ended December 31,

Year Ended December 31,

Operating expenses:

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Loss from operations

Interest income, net

Interest income

Interest expense

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(in thousands except share amounts)

For the years ended December 31, 2019 and 2018

Series A Redeemable

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Balance December 31, 2019

Issuance of common stock in connection

with private placement, net of issuance

costs of $7,372

Exercise of stock options

Stock based compensation

Other comprehensive income

Balance December 31, 2020

See accompanying notes to the financial statements

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(in thousands)

For the Year Ended December 31,

Year Ended December 31,

Cash flows from operating activities

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Accretion of discount on convertible promissory notes payable

Amortization of discount on available for sale investments

Amortization of premium / (discount) on available for sale investments

Change in fair value of derivative liability

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Proceeds from initial public offering, net of stock offering costs

Proceeds from private placement offering, net of issuance costs

Net cash provided by financing activities

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Cash and cash equivalents at beginning of period

Cash and cash equivalents cash at end of period

Cash and cash equivalents at end of period

Supplemental disclosures of non-cash information:

Right-of-use assets obtained in exchange for new operating lease liabilities

Conversion of Series A redeemable convertible preferred stock to common stock on

initial public offering

Conversion of Series B redeemable convertible preferred stock to common stock on

initial public offering

Acceleration of vesting of Series B redeemable convertible preferred stock on initial

public offering

Issuance of Series B redeemable convertible preferred stock in connection with

conversion of convertible promissory notes and accrued interest

Conversion of Series A redeemable convertible preferred stock to common

stock on initial public offering

Conversion of Series B redeemable convertible preferred stock to common

stock on initial public offering

Acceleration of vesting of Series B redeemable convertible preferred stock

on initial public offering

Issuance of Series B redeemable convertible preferred stock in connection

with conversion of convertible promissory notes and accrued interest

Issuance of Series B redeemable convertible stock for facility lease

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Cortexyme is targeting a specific, infectious pathogen tied to neurodegeneration and chronic inflammation in humans and animal models.

Reverse Stock Split

On April 25, 2019, the Company’s Board of Directors approved a one-for-0.367647 reverse split of the Company’s issued and outstanding common stock, redeemable convertible preferred stock, and stock options.

The par value of the common stock was not adjusted as a result of the reverse stock split.

All share and per share amounts in the accompanying financial statements and notes to the financial statements have been retroactively adjusted for all periods presented to reflect the reverse stock split.

Initial Public Offering

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In addition, in connection with the closing of the IPO, all of the Company’s outstanding shares of redeemable convertible preferred stock were automatically converted into 18,161,027 shares of common stock, and there are no shares of redeemable convertible preferred stock outstanding as of December 31, 2020.

Private Investment in Public Equity (“PIPE”)

In February 2020, the Company completed a private investment in public equity transaction (“PIPE Financing”).

The Company entered into Stock Purchase Agreements (the “Purchase Agreements”) with certain accredited investors, including an entity affiliated with a member of the Company’s Board of Directors, pursuant to which the Company sold and issued shares of common stock for aggregate gross proceeds of $125.0 million.

Costs related to the offering were $7.4 million.

Pursuant to the Purchase Agreements, the Company sold 2,500,000 common shares at $50.00 per common share.

In connection with the PIPE Financing, the Company filed a registration statement on Form S-1 (File No.

333-237594), with the SEC registering for resale the shares of common stock issued in the PIPE Financing.

The registration statement was declared effective by the SEC on April 13, 2020.

Liquidity and Capital Resources

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As of December 31, 2020, the Company had an accumulated deficit of $146.7 million.

Since inception through December 31, 2019, the Company has funded operations primarily with the net proceeds from the issuance of convertible promissory notes, from the issuance of redeemable convertible preferred stock and from the net proceeds from the IPO.

Since inception through December 31, 2020, the Company has funded operations primarily with the net proceeds from the issuance of convertible promissory notes, from the issuance of redeemable convertible preferred stock, from the net proceeds from the IPO and from the net proceeds from the PIPE Financing.

As of December 31, 2020, the Company had cash, cash equivalents, and short-term investments of $133.8 million, which it believes will be sufficient to fund its planned operations for a period of at least 12 months from the date of the issuance of the accompanying financial statements.

The Company also has long-term investments of $50.5 million.

Management expects to incur additional losses in the future to fund its operations and conduct product research and development and may need to raise additional capital to fully implement its business plan.

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The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and expenses, as well as related disclosure of contingent assets and liabilities.

The most significant estimates used in the Company’s financial statements relate to the determination of the fair value of common stock prior to the initial public offering, stock-based awards and other issuances, valuation of derivative instruments, accruals for research and development costs, useful lives of long-lived assets, stock-based compensation and related assumptions, the incremental borrowing rate for leases and income tax uncertainties, including a valuation allowance for deferred tax assets;

The most significant estimates used in the Company’s financial statements relate to the determination of the fair value of common stock prior to the initial public offering, accruals for research and development costs, useful lives of long-lived assets, stock-based compensation and related assumptions, the incremental borrowing rate for leases and income tax uncertainties, including a valuation allowance for deferred tax assets;

and contingencies.

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If the Company was denied approval, approval was delayed or the Company was unable to maintain approval for any drug candidate, it could have a materially adverse impact on the Company.

In connection with the COVID-19 pandemic, governments have implemented significant measures, including closures, quarantines, travel restrictions and other social distancing directives, intended to control the spread of the virus.

Companies have also taken precautions, such as requiring employees to work remotely, imposing travel restrictions, and temporarily closing businesses.

To the extent that these restrictions remain in place, additional prevention and mitigation measures are implemented in the future or there is uncertainty about the effectiveness of these or any other measures to contain or treat COVID-19, there is likely to be a continuing, adverse impact on global economic conditions and consumer confidence and spending, which could materially and adversely affect the Company’s research and development, as well as operational activities.

At this time, the Company continues to manage and mitigate potential disruptions to its research and future manufacturing and supply chain considerations.

The Company has not experienced significant hinderances to its operations or material negative financial impacts as compared to prior periods.

At this time, the extent to which the COVID-19 pandemic impacts the Company’s business will depend on future developments which are highly uncertain and cannot be predicted.

The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing therapeutics.

The Company’s chief executive officer, who is the chief operating decision makers, reviews financial information on an aggregate basis for purposes of allocating and evaluating financial performance.

The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating and evaluating financial performance.

All long-lived assets are maintained in the United States of America.

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Unrealized gains and losses are recorded as a component of other comprehensive loss in the statement of operations and included as a separate component of redeemable convertible preferred stock and stockholders’ equity (deficit).

Realized gains and losses are included in interest and other income, net in the statements of operations and comprehensive loss.

Realized gains and losses are included in interest income in the statements of operations and comprehensive loss.

Premiums (discounts) are amortized (accreted) over the life of the related investment as an adjustment to yield using the straight-line interest method.

Dividend and interest income are recognized when earned.

These amounts are recorded in “Interest income, net” in the Statement of Operations.

These amounts are recorded in “interest income” in the statements of operations and comprehensive loss.

Property and Equipment, Net

Property and equipment are stated at cost and reduced by accumulated depreciation.

Depreciation expense is recognized using the straight-line method over the estimated useful lives of the assets, generally five years.

Depreciation expense is recognized using the straight-line method over the estimated useful lives of the respective assets.

Depreciation and amortization begin at the time the asset is placed in service.

Maintenance and repairs are charged to expense as incurred, and improvements are capitalized.

When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in operations in the period realized.

The useful lives of property and equipment are as follows:

Computer equipment

Lab equipment

Finance lease right of use assets

Shorter of estimated useful life or lease term

Leasehold improvement

Shorter of estimated useful life or lease term

Office furniture

Concentration of Credit Risk

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The Company did not recognize any impairment charges for the years ended December 31, 2020, 2019 and 2018.

Deferred Offering Costs

Deferred offering costs, consisting of direct legal, accounting, filing and other fees directly related to the Company’s initial public offering of its common stock (IPO), are capitalized.

The deferred offering costs was reclassified to additional paid-in capital upon the closing of the IPO.

The Company deferred $34,000 as of December 31, 2018, which is included in prepaid expense and other assets in the accompanying balance sheets.

The Company adopted Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842) as of January 1, 2019 using the modified retrospective method.

The results for years ended December 31, 2019 and 2020 are presented under ASC 842.

The results for the year ended December 31, 2018 were not adjusted and continue to be reported in accordance with historical accounting under prior lease guidance, ASC 840, Leases (Topic 840).

The Company also elected the package of practical expedients under the transition guidance that will retain the historical lease classification and initial direct costs for any leases that existed prior to adoption of the new guidance and the practical expedient to not separate lease and non-lease components.

The Company determines if an arrangement includes a lease at inception.

Right-of-use lease assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date.

The right-of-use lease asset includes any lease payments made and excludes lease incentives.

Incremental borrowing rate is used in determining the present value of future payments.

The Company applies a portfolio approach to the property leases to apply an incremental borrowing rate to leases with similar lease terms.

The lease terms may include options to extend or terminate the lease.

The Company recognizes the options to extend the lease as part of the right-of-use lease assets and lease liabilities only if it is reasonably certain that the option would be exercised.

Lease expense for minimum lease payments is recognized on a straight-line basis over the non-cancelable lease term.

As a result of the adoption of the new guidance, effective January 1, 2019, the Company recorded a right-of-use lease asset of $0.9 million, a short-term lease liability of $0.3 million , and a long-term lease liability of $0.6 million and no cumulative effect adjustment was made to the retained earnings as of the adoption date.

Leases” for further disclosure.

Research and Development Expenses

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Payments made to third parties under these arrangements in advance of the performance of the related services by the third parties are recorded as prepaid expenses until the services are rendered.

Expenses related to clinical studies are generally recorded based on the timing of when services that have been performed on the Company’s behalf by the service providers and in accordance with the contracts.

Expenses related to clinical studies are generally recorded based on the timing of when services that have been performed on the Company’s behalf by the service providers, clinical trial budgets and in accordance with the contracts and related amendments.

The determination of timing involves reviewing open contracts and purchase orders, communicating with applicable personnel to identify the timing of when services that have been performed on the Company’s behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of actual cost.

The majority of service providers’ invoice at least monthly in arrears for services performed.

The Company periodically confirms the accuracy of estimates with the service providers and makes adjustments if necessary.

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The Company accounts for stock-based compensation arrangements with employees in accordance with Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation.

Stock-based awards granted include stock options with time-based vesting.

Stock-based awards granted include stock options with service-based vesting.

ASC 718 requires the recognition of compensation expense, using a fair value-based method, for costs related to all stock-based payments.

The Company’s determination of the fair value of stock options with time-based vesting on the date of grant utilizes the Black-Scholes option-pricing model, and is impacted by its common stock price as well as other variables including:

The Company’s determination of the fair value of stock options with service-based vesting on the date of grant utilizes the Black-Scholes option-pricing model and is impacted by its common stock price as well as other variables including:

but not limited to, expected term that options will remain outstanding, expected common stock price volatility over the term of the option awards, risk-free interest rates and expected dividends.

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Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur.

The Company uses a Monte Carlo Simulation method to estimate the grant date fair value of stock option awards with market-based performance conditions.

Redeemable Convertible Preferred Stock

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The convertible preferred stock was recorded outside of stockholders’ equity (deficit) because, in the event of certain deemed liquidation events considered not solely within the Company’s control, such as a merger, acquisition and sale of all or substantially all of all the Company’s assets, the convertible preferred stock will become redeemable at the option of the holders.

Additionally, on or after May 23, 2025, 60% of the holders may have demanded redemption of the stock.

In the event of a change of control of the Company, proceeds received from the sale of such shares would have been distributed in accordance with the liquidation preferences set forth in the Company’s Amended and Restated Certificate of Incorporation unless the holders of convertible preferred stock had converted their shares of convertible preferred stock into shares of common stock.

Additionally, holders with 60% of majority had the right to demand redemption on or after May 23, 2025.

convertible preferred stock ha d converted their shares of convertible preferred stock into shares of common stock.

The Company determined not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty of whether or when such an event would occur.

In connection with the closing of the IPO, all of the Company’s outstanding shares of redeemable convertible preferred stock were automatically converted into 18,161,027 shares of common stock, and there are no shares of redeemable convertible preferred stock outstanding as of December 31, 2019.

Fair Value of Warrants

Warrants were recorded either as equity instruments or derivative liabilities at their estimated fair value at the date of issuance.

In the case of warrants recorded as liabilities, subsequent changes in estimated fair value were recorded in the Company’s statement of operations in each subsequent period.

The warrants were measured at estimated fair value using the Black Scholes valuation model, which was based, in part, upon inputs for which there was little or no observable market data, requiring the Company to develop its own assumptions.

Inherent in this model were assumptions related to expected stock price volatility, expected life, risk-free interest rate and dividend yield.

The Company estimated the volatility of its common stock at the date of issuance, and at each subsequent reporting period, based on historical volatility that matched the expected remaining life of the warrants.

The risk-free interest rate was based on the U.S.

Treasury zero-coupon yield curve on the measurement date for a maturity similar to the expected remaining life of the warrants.

The expected life of the warrants was assumed to be equivalent to their remaining contractual term.

The dividend rate was based on the Company’s historical rate, which was at zero.

The assumptions used in calculating the estimated fair value of the warrants represented the Company’s best estimates.

However, these estimates involved inherent uncertainties and the application of management judgment.

As a result, if factors changed and different assumptions were used, the warrant liability and the change in estimated fair value could be materially different.

As of December 31, 2018, warrants to purchase 27,941 shares of common stock were outstanding and are recorded as equity instruments.

In connection with the closing of the IPO, all the Company’s outstanding warrants were exercised.

No warrants are outstanding as of December 31, 2019

Derivative Liability

ASC 815-15, Derivatives and Hedging:

Embedded Derivatives, generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments.

These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirement of ASC 815.

The Company issued certain convertible promissory notes in 2018 to current and new investors which contained an embedded der ivative instrument, a share redemption feature that settles upon the next qualified preferred stock financing.

This embedded put option was not considered clearly and closely related to the debt host and resulted in an embedded derivative that must be bifu rcated and accounted for separately from the debt host.

Accordingly, the Company recorded the bifurcated redemption feature as a derivative liability.

Derivative financial liabilities were initially recorded at fair value, with gains and losses arising for changes in fair value recognized in the statement of operations at each period end while such instruments were outstanding.

In May 2018, the convertible promissory notes including the redemption premium were converted into Series B redeemable convertible preferred stock.

See Note 10 for further discussion of the convertible promissory notes and the bifurcated derivative liability.

The Company accounts for income taxes under the asset and liability method.

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Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period, resulting from transactions and other events and circumstances from non-owner sources.

The Company had unrealized gain from its available-for-sale securities during the year ended December 31, 2019 and an unrealized loss from its available-for sale securities during the year ended December 31, 2018, which are considered other comprehensive income (loss).

The Company had unrealized gain from its available-for-sale securities during the years ended December 31, 2020 and 2019 and an unrealized loss from its available-for sale securities during the year ended December 31, 2018, which are considered other comprehensive income (loss).

Net Loss per Share

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Because the Company reported a net loss for the years ended December 31, 2020, 2019 and 2018, and the inclusion of the potentially dilutive securities would be antidilutive, diluted net loss per share is the same as basic net loss per share for both periods.

Recent Accounting Pronouncements

Recent Accounting Pronouncements Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):

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The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements.

This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

The Company does not believe this pronouncement will have a material impact on its financial statements or disclosures.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit L osses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information t o inform credit loss estimates.

For Smaller Reporting Companies as defined by the SEC, ASU 2016-13 is effective for fiscal years beginning after December 15, 20 22 , including interim periods within those fiscal years.

The Company is evaluating the impact of the guidance on its financial statements.

The Company adopted this effective January 1, 2020.

The adoption of this pronouncement did not have a material impact on its financial statements or disclosures.

In August 2018, the FASB issued ASU No.

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Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”), which clarifies the accounting for implementation costs in cloud computing arrangements.

ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company will adopt the standard prospectively on January 1, 2020.

The Company does not expect the adoption of ASU 2018-15 to result in a material change to its financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) .

This ASU requires that substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases.

The ASU is effective for interim and annual periods beginning after December 15, 2018.

Additionally, the FASB issued ASU No.

2018-11, Leases (Topic 842) :

Targeted Improvements, which offers an additional transition method whereby entities may apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than application of the new leases standard at the beginning of the earliest period presented in the financial statements.

The Company elected this transition method and adopted ASC 842 on January 1, 2019 and as a result, recorded a right-of-use asset of $0.9 million, a short-term lease liability of $0.3 million, and a long-term lease liability of $0.6 million and no cumulative effect adjustment was made to the retained earnings as of the adoption date.

The Company has elected not to recognize a right-of-use asset and lease liability for short-term leases.

A short-term lease is a lease with an expected lease term of 12 months or less and which does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

The Company also elected the package of practical expedients under the transition guidance that will retain the historical lease classification and initial direct costs for any leases that exist prior to adoption of the new guidance and the practical expedient to not separate lease and nonlease components.

See Note 6 for further disclosure.

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 redeemable 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.

For public entities, ASU 2017-11 is required to be adopted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years.

The adoption of ASU 2017-11 did not have any impact on the Company’s financial statements since the Company did not have any instruments subject to the scope of ASU 2017-11.

On December 18, 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.

The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted.

The Company early adopted the new accounting standard effective January 1, 2019.

The adoption did not have a material impact on the Company’s financial statements.

The Company adopted the standard prospectively on January 1, 2020.

The adoption of this pronouncement did not have a material impact on its financial statements.

Recent Accounting Pronouncements Not Yet Adopted

The following are new accounting pronouncements that the Company is evaluating for future impacts on its financial statements:

Financial Instruments—Credit Losses:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments which amends the principles around the recognition of credit losses by mandating entities incorporate an estimate of current expected credit losses when determining the value of certain assets.

The guidance also amends reporting around allowances for credit losses on available-for-sale marketable securities.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842):

Effective Dates, which established that a one-time determination of the effective date for ASU 2016-13 would be based on the Company’s SEC reporting status as of November 15, 2019.

The Company was a Smaller Reporting Company as defined by the SEC, and therefore, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company is evaluating the impact of the guidance on its financial statements.

All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.

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There were no transfers within the hierarchy during the years ended December 31, 2020 and 2019.

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by major security type as of December 31, 2019 and December 31, 2018 are presented in the following tables (in thousands):

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements by major security type as of December 31, 2020 and 2019 are presented in the following tables (in thousands):

Fair Value Measurements at December 31, 2020

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Corporate notes

Government notes

Commercial Paper

Government and agency notes

Municipal notes

Fair Value Measurements at December 31, 2019

Money market funds

Commercial Paper

Certificates of Deposit

Repurchase Agreements

Corporate notes

Government notes

Asset backed securities

The change in the derivative liability is as follows (in thousands):

Fair Value at beginning of period

Bifurcated derivative liability

Change in fair value

Conversion of promissory notes to Series B redeemable convertible preferred stock

Fair value at end of period

See Note 10 for further discussion of the derivative liability.

Commercial Paper

Cash, Cash Equivalents and Investments

The following tables categorize the fair values of cash, cash equivalents, and short-term investments measured at fair value on a recurring basis on our balance sheet (in thousands):

The following tables categorize the fair values of cash, cash equivalents, short-term investments and long-term investments measured at fair value on a recurring basis on our balance sheets (in thousands):

Cash and cash equivalents:

Money market funds

Commercial paper

Certificate of deposits

Repurchase agreements

Certificates of deposit

Corporate notes

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Commercial paper

Certificates of deposit

Municipal notes

Corporate notes

Government notes

Certificate of deposits

Government and agency notes

Total short-term investments

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Corporate notes

Certificate of deposits

Certificates of deposit

Municipal notes

Government and agency notes

Total long-term investments

The investments are classified as available-for-sale securities.

As of December 31, 2020, the weighted average remaining contractual maturities of available-for-sale securities was approximately 10 months.

At December 31, 2020 and 2019, the balance in the Company’s accumulated other comprehensive income (loss) was comprised solely of activity related to the Company’s available-for-sale securities.

There were no realized gains or losses recognized on the sale or maturity of available-for-sale securities for the year ended December 31, 2019 or 2018 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income for the year.

The Company has a limited number of available-for-sale securities in insignificant loss positions as of December 31, 2019 and 2018, which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized cost for the investment at maturity.

There were no realized gains or losses recognized on the sale or maturity of available-for-sale securities for the years ended December 31, 2020, 2019 or 2018 and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive income for the year.

The Company has a limited number of available-for-sale securities in insignificant unrealized loss positions as of December 31, 2020 and 2019, which the Company does not intend to sell and has concluded it will not be required to sell before recovery of the amortized cost for the investment at maturity.

The following table summarizes the available-for-sale securities (in thousands):

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Corporate notes

Government notes

Commercial Paper

Government and agency notes

Municipal notes

Total cash equivalents and investments

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Cash equivalents (maturities within 90 days)

Short-term investments (maturities within

Long-term investments (maturities beyond

Short-term investments (maturities within one year)

Long-term investments (maturities beyond 1 year)

Total cash equivalents and investments

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Money market funds

Commercial paper

Certificates of Deposit

Repurchase Agreements

Corporate notes

Government notes

Asset backed securities

Commercial Paper

Total cash equivalents and investments

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Cash equivalents (maturities within 90 days)

Short-term investments (maturities within

Short-term investments (maturities within one year)

Long-term investments (maturities beyond 1 year)

Total cash equivalents and investments

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Prepaid expenses

Prepaid insurance

Prepaid research and development expenses

Other current assets

Total prepaid expenses and other current assets

Property and equipment, net

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Finance lease right of use assets

Leasehold improvement

Office furniture

accumulated amortization and depreciation

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Accrued liabilities consisted of the following (in thousands):

Personnel expense

Research and development expenses

Personnel expenses

Professional fees

Total accrued liabilities

As described in “Note 2 Summary of Significant Accounting Policies,” the Company adopted Topic 842 as of January 1, 2019.

Prior period amounts have not been adjusted and continue to be reported in accordance with historic accounting under Topic 840.

Research and development expenses

Total accrued expenses and other current liabilities

Real Estate Operating Leases

In June 2018, the Company entered into a three-year lease agreement with no renewal options with a related party, one of the investors in the Series B redeemable convertible preferred stock.

In June 2018, the Company entered into a three-year lease agreement with no renewal options with an investor in the Series B redeemable convertible preferred stock.

The lease began on July 16, 2018 and provides 3,185 square feet of office and laboratory space in South San Francisco, California.

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The scheduled release of shares ceased immediately upon the IPO which was a terminating event.

The Company completed its IPO on May 13, 2019 and as a result, pursuant to the terms of the lease agreement, all previously unvested shares were fully vested and as part of the IPO process, all outstanding shares of the Company’s redeemable convertible preferred stock including the Series B redeemable convertible preferred stock issued in connection with the lease agreement were converted into shares of the Company’s common stock on a 1-for-1 basis and the operating lease liability was extinguished as the entire lease became prepaid.

In May 2019, the Company entered into an amendment to the lease agreement to rent additional space in the same facility under the same terms as its existing facility lease except the terms of payment.

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As the entire lease is prepaid, there is no associated lease liability.

In May 2020, the Company entered into a second amendment to the lease agreement to rent additional space in the same facility under the same terms as its existing facility lease except the terms of payment.

Under the terms of the amendment, the Company will pay rent monthly for the additional space and the lease agreement will terminate in July 2021.

The Company recorded an operating lease asset and liability of $172,000 .

The Company believes suitable space will be available before the July 2021 lease termination of its South San Francisco facility.

In May 2020, the Company entered into a lease agreement to rent space in San Diego, California for our clinical operations team.

The lease agreement is for three years which commenced August 1, 2020.

Total payments under the lease will be $337,000.

The Company paid a security deposit of $29,000 and is included in Other Assets on our December 31, 2020 balance sheet.

At the commencement of the lease, the Company recorded an operating lease asset of $326,000, which consists of an operating lease liability of $317,000 and cash rent prepayment of $9,000.

The Company recognizes lease expense on a straight-line basis over the term of its operating lease.

As of December 31, 2019, future rent expense of approximately $625,000 will be recognized over the remaining term of 19 months on a straight-line basis over the respect ive lease period.

As of December 31, 2020, future rent expense of $596,000 will be recognized over the remaining terms of 7 to 31 months on a straight-line basis over the respective lease period.

Clinical Equipment Operating Lease

The Company uses certain vendor supplied equipment in connection with its on-going clinical trial.

The Company has analyzed the vendor agreement and determined that it contains an embedded operating lease.

The Company recognizes monthly the leases costs in our research and development expenses.

The right of use asset and lease liability are recognized at the lease commencement date based on the present value of lease payments over the lease term.

The Company’s lease does not provide an implicit rate.

The Company used an adjusted historical incremental borrowing rate, based on the information available at the approximate lease commencement date, to determine the present value of lease payments.

The remaining lease expense of $79,000 will be recognized over the remaining lease term of approximately 20 months.

Clinical Equipment Financing Lease

During the second quarter of 2019, the Company began using certain vendor supplied equipment in connection with its on-going clinical trial.

The Company analyzed the agreements and determined that they contained embedded leases.

Under the agreements, the Company has prepaid for the use of the equipment through the initial lease term of approximately three years.

As a result, the Company has no lease liability associated with these right of use assets.

The Company records the finance lease right of use assets in “Property and equipment, net” line on the Balance Sheet.

The Company recognizes the amortization expense in research and development expenses in the statement of operations and recognizes expense on a straight-line basis starting when the equipment is placed into service until the end of the contract term.

Equipment placed into service is amortized into expense over periods ranging from 28 to 34 months.

Amortization expense of the financing lease right of use asset for the year ended December 31, 2019 was $107,000.

Operating and finance lease right of use asset amounts consist of the following as of December 31, 2019 (in thousands):

The Company uses certain vendor supplied equipment in connection with its on-going clinical trial.

The Company has analyzed the vendor agreements and determined that they contain embedded finance leases.

The Company recognizes the depreciation expense in research and development expenses in the statements of operations and comprehensive loss and recognizes expense on a straight-line basis starting when the equipment is placed into service until the end of the contract term ranging from 20 to 34 months.

Depreciation expense of the financing lease right of use asset for the years ended December 31, 2020, 2019 and 2018 were $230,000, $107,000, and $0, respectively.

Supplemental balance sheet information related to leases as follows (in thousands except lease terms and discount rates):

December 31, 2020

December 31, 2019

Operating lease right of use asset, net

Short-term operating lease liability

Long-term operating lease liability

Finance lease right of use asset

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Total finance lease right of use asset, net

The Company determined its operating and finance lease liabilities for operating lease using a discount rate of 4.00% based on the rate that the Company would have to pay to borrow on a collateralized basis for a similar lease an amount equal to the lease payments in a similar economic environment.

As of December 31, 2019, the weighted-average remaining lease term for the operating leases was 1.6 years.

The weighted-average remaining lease term for the finance leases was 2.09 years.

Lease costs for the years ended December 31, 2019 was approximately:

Weighted average remaining lease term

Operating leases

Finance leases

Weighted average discount rate

Operating leases

Finance leases

Year ended December 31,

Operating Lease

Total lease payments

imputed interest

Total remaining lease liability

Lease costs for the years ended December 31, 2020 and 2019 were approximately:

Years ended December 31,

Finance lease amortization of right of use assets

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The Company believes the fair value of the indemnification rights and agreements is minimal.

Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of December 31, 2019.

Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of December 31, 2020 and 2019.

Contingencies

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We accrue a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated.

Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Redeemable Convertible Preferred Stock

As of December 31, 2018, the outstanding redeemable convertible preferred stock was as follows (in thousands except for share and per share amounts):

Shares Issued

and Outstanding

Issuance Price

Carrying Value

On May 13, 2019 in connection with the closing of the IPO, these shares were automatically converted into 18,161,027 shares of common stock, and there are no shares of redeemable convertible preferred stock outstanding as of December 31, 2019.

As of December 31, 2019, the Company had reserved common stock for issuance as follows:

December 31, 2019

Common Stock and Common Stock Warrant

The Company had reserved shares of common stock for future issuance as follows:

Options issued and outstanding under the 2019 Stock Plan

Shares available for issuance under 2019 Stock Plan

Shares available for issuance under the Employee Stock Ownership Plan

Shares available for issuance under the Employee Stock Purchase Plan

The Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.001 per share.

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The warrant was fully exercised in May 2019.

Stock Option Plan

Equity Incentive Plans

On December 4, 2014, the Company’s stockholders approved the 2014 Stock Plan (“2014 Plan”), and most recently amended the 2014 Plan on April 25, 2019.

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and (iii) such other amount as the Company’s Board of Directors may determine.

The 2019 Plan may be amended, suspended or terminated by the Company’s Board of Directors at any time, provided such action does not impair the existing rights of any p articipant, subject to stockholder approval of any amendment to the 2019 Plan as required by applicable law or listing requirements.

The 2019 Plan may be amended, suspended or terminated by the Company’s Board of Directors at any time, provided such action does not impair the existing rights of any participant, subject to stockholder approval of any amendment to the 2019 Plan as required by applicable law or listing requirements.

Unless sooner terminated by the Company’s Board of Directors, the 2019 Plan will automatically terminate on April 23, 2029.

As of December 31, 2020, the Company had 269,353 shares available for future issuance under the 2019 Plan.

In 2019 and 2018, the Company recognized $2,056,000 and $155,000 respectively, of stock-based compensation expense related to options granted to employees and non-employees.

The compensation expense is allocated on a departmental basis, based on the classification of the option holder.

No income tax benefits have been recognized in the statement of operations for stock-based compensation arrangements.

Future stock-based compensation for unvested employee and non-employee options granted and outstanding as of December 31, 2019 is $6.4 million to be recognized over a remaining weighted average requisite service period of 1.42 years.

Stock option activity under the 2019 Plan is as follows:

Stock Options

Activity for service-based stock options under the 2019 Plan is as follows:

Exercise Price

(In thousands)

Balance at December 31, 2017

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Options exercised

Options cancelled

Options cancelled / forfeited

Balance at December 31, 2018

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Options exercised

Options forfeited / expired

Options cancelled / forfeited

Balance at December 31, 2019

Options granted

Options exercised

Options cancelled / forfeited

Balance at December 31, 2020

Options vested and expected to vest to December 31, 2020

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Aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock as of their respective balance sheet dates and the exercise price of outstanding options.

The total intrinsic value of options exercised was $886,989 and $91,000 for the year ended December 31, 2019 and 2018, respectively.

During the year ended December 31, 2019, the weighted-average grant-date fair value of the options vested was $2.35 per share.

The total intrinsic value of options exercised was $6,697,000, $887,000 and $91,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

The weighted-average grant date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $31.21, $11.11 and $1.26 per share, respectively.

The total estimated grant date fair value of options vested during the years ended December 31, 2020, 2019, and 2018 was $10.5 million, $1.2 million, and $0.1 million, respectively.

In 2020, 2019 and 2018, the Company recognized $14,267,000, $2,056,000, and $155,000 respectively, of stock-based compensation expense related to options granted to employees and non-employees.

The compensation expense is allocated on a departmental basis, based on the classification of the option holder.

No income tax benefits have been recognized in the statement of operations for stock-based compensation arrangements.

As of December 31, 2020, total unamortized employee stock-based compensation was $72.7 million, which is expected to be recognized over the remaining estimated vesting period of 1.72 years.

Performance Stock Options (“PSOs”)

In December 2020, the Company granted 675,000 performance stock options (“PSOs”) under the Stock Incentive Plan to its executive and senior officers.

Vesting for the options is performance based and is based on continued employment at the vesting date, with the options vesting in two installments if the Company’s average closing price in any 45 consecutive trading day period exceeds a certain amount per share prior to March 15, 2023 and March 15, 2024, respectively.

PSOs represent a contingent right to purchase Common Stock upon achievement of specified market conditions.

The Company recognized stock-based compensation expense of $203,000 in 2020 relating to these PSOs.

The weighted-average grant date fair value of the PSOs granted during 2020 was $14.90 per share.

As of December 31, 2020, total unamortized stock-based compensation related to PSOs was $9,854,000, which is expected to be recognized over the remaining estimated vesting period of 2.75 years.

Total intrinsic value for PSOs outstanding was $0 for the year ended December 31, 2020.

The following table summarizes activity under the Company’s PSOs from the 2019 Plan and related information:

Shares Subject to Outstanding PSOs

Exercise Price

Weighted average remaining contractual life (years)

Balance at December 31, 2019

Options granted

Options exercised

Options cancelled

Balance at December 31, 2020

Stock-Based Compensation Expense

The following table summarizes employee and non-employee stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018 and the allocation within the statements of operations and comprehensive loss (in thousands):

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Total stock-based compensation

The Company estimates the fair value of stock-based compensation utilizing the Black-Scholes option pricing model, which is dependent upon several variables, such as expected term, volatility, risk-free interest rate, and expected dividends.

The Company estimates the fair value of its service-based stock option awards utilizing the Black-Scholes option pricing model, which is dependent upon several variables, such as expected term, volatility, risk-free interest rate, and expected dividends.

Each of these inputs is subjective and generally requires significant judgment to determine.

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally t he vesting period of the respective award.

The Company recognizes compensation on a straight-line basis over the requisite vesting period for each award.

Forfeitures are recognized as they occur.

The following weighted average assumptions were used to calc ulate the fair value of stock-based compensation as of December 31, 2019 and 2018 :

The following weighted average assumptions were used to calculate the fair value of stock-based compensation for the years ended December 31, 2020, 2019 and 2018:

Expected volatility

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Expected Term — The Company has opted to use the “simplified method” for estimating the expected term of options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).

Expected Volatility — Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

Expected Volatility—Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of its own stock and the stock of companies within its defined peer group.

The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards.

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The board of directors intends all options granted to be exercisable at a price per share not less than the estimated per share fair value of common stock underlying those options on the date of grant.

As of December 31, 2019 and 2018, there was a total of $6.0 million and $1.57 million, respectively, of unrecognized employee and non-employee compensation costs related to non-vested stock option awards.

The fair value of shares vested during the respective years was $1,193,000 and $102,000, respectively.

The Company estimated the grant date fair value of its market-based performance stock option awards granted during the year ended December 31, 2020 using a Monte Carlo Simulation method by applying the following assumptions:

Expected share price volatility

Contractual term, in years

Risk-free interest rate

Employee Stock Purchase Plan

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This agreement was amended in April 2019 and the royalty payment provision was removed.

As described in Note 6, the Company entered into a three-year lease agreement with a Series B redeemable preferred stock investor.

The lease began on July 16, 2018 and provides 3,185 square feet of office space in South San Francisco, California.

The Company issued 114,437 restricted shares of its Series B redeemable convertible preferred stock in exchange for the use of the leased facility.

In May 2019, the Company entered into an amendment to the lease agreement to rent additional space in the same building for a one-time payment of approximately $63,000 on the same terms as the July 2018 agreement except rent.

Under the terms of the convertible promissory notes described in Note 10, certain board members provided $5.05 million in principal value in the note offering which accrued interest at 8% per annum.

These board members received a total of $534,000 interest which converted per the terms of the promissory note into 69,465 shares of Series B redeemable convertible preferred stock on May 23, 2018.

As described in Note 1, the Company completed its IPO in May 2019.

As a result of the IPO, in addition to the 229,453 shares of Series B redeemable convertible preferred stock held by the investor, an additional 82,649 shares of the Company’s Series B redeemable convertible preferred stock under issued pursuant the lease agreement fully vested and were converted into common stock of the Company on a one-to-one basis.

As described in Note 1, o n February 10, 2020, the Company issued and sold shares of common stock at a purchase price of $50.00 per share in a private placement.

In the private placement, the Company issued and sold 30,000 shares of common stock for an aggregate purchase price of $1,500,000 to an entity affiliated with David A.

Lamond, a member of the Company’s Board of Directors.

On January 13, 2021, the Company entered into an agreement with LifeSci Advisors, LLC for investor relations consulting services.

The Company’s Chief Operating Officer and Chief Financial Officer, Christopher Lowe, has an investment in a sister entity to LifeSci Advisors, LLC whose business is unrelated to the services being offered by LifeSci Advisors, LLC to the Company.

The Company will pay $180,000 to LifeSci Advisors, LLC over the one-year term of the agreement.

From inception through 2020, the Company has only generated pretax losses in the United States and has not generated any pretax income or loss outside of the United States.

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Other accruals and deferred expense

Total deferred tax asset

Gross deferred tax asset

Valuation allowance

Total deferred tax assets

Deferred tax liabilities:

Property and equipment

Less valuation allowance

Capitalized leases

Gross deferred tax liabilities

Net deferred tax assets

Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit car ryforwards.

The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets.

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accordingly, a full valuation allowance has been established and no deferred tax asset is shown in the accompanying balance sheets.

The valuation allowance increased by approximately $8.5 million and $3.1 million respectively for the years ended December 31, 2019 and 2018.

The valuation allowance increased by approximately $18.5 million and $8.5 million and $3.0 million respectively for the years ended December 31, 2020, 2019 and 2018.

At December 31, 2020, the Company has federal net operating loss carryforwards of approximately $128.2 million of which $112.3 million will not expire and $15.9 million begin expiring in 2034.

The Company also has state net operating loss carryforwards of approximately $4.9 million which begin to expire in 2034.

Additionally, the Company has federal and state tax credits of approximately $3.0 million which begin to expire in 2036.

Additionally, the Company has federal tax credits of approximately $4.9 million which begin to expire in 2036 and state tax credits of approximately $1.1 million which do not expire.

Use of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S.

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The annual limitation may result in the expiration of net operating losses and credits before use.

Pursuant to the Internal Revenue Code, as amended (the “Code”) Sections 382 and 383, annual use of a company’s NOL and research and development credit carryforwards may be limited if there is a cumulative change in ownership of greater than 50% within a three-year period.

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.

If limited, the related tax asset would be removed from the deferred tax asset schedule with a corresponding reduction in the valuation allowance.

The Company has not completed such an analysis pursuant to Sections 382 and 383 and therefore has established a valuation allowance as the realization of such deferred tax assets has not met the more likely than not threshold requirement.

Due to the existence of the valuation allowance, further changes in the Company’s unrecognized tax benefits will not impact the Company’s effective tax rate.

Uncertain Tax Positions

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Because of the net operating loss and research credit carryforwards, all of the Company’s tax years, from 2013 to 2020, remain open to U.S.

federal and California state tax examinations.

There were no interest or penalties accrued at December 31, 2019 and December 31, 2018.

federal, California, and other state tax examinations.

There were no interest or penalties accrued at December 31, 2020, 2019 and 2018.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

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Ending balance

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") into law.

The Company has reviewed the aspects of this law as it relates to income taxes and have concluded that at this time, the CARES Act will have no material impact to the Company’s 2020 provision for income taxes.

Net Loss per Share

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Series B convertible preferred stock

Options issued and outstanding

Stock options issued and outstanding

Performance stock options

Employee Benefit Plan

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The Company may match employee contributions, and may make profit sharing contributions, in amounts to be determined at the Company’s sole discretion.

The Company made no contributions to the plan for the years ended December 31, 2019 and 2018.

Subsequent Events

Private Investment in Public Equity (“PIPE”)

On February 10, 2020, the Company sold and issued 2,500,000 shares of common stock in a private placement to a group of institutional investors and an entity affiliated with a member of the Company’s board of directors for aggregate gross proceeds of $125.0 million.

Costs related to the offering were $7.4 million.

In connection with the private placement, the Company is obligated to prepare and file with the SEC within 60 days of the closing date, a registration statement to register for resale the shares of common stock sold in the private placement.

Changes in and Disagreements with Accou ntants on Accounting and Finan cial Disclosure.

The Company made no contributions to the plan for the years ended December 31, 2020, 2019, and 2018, respectively.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk