Quince Therapeutics, Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 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. 69 Item 8. Financial Statement s and Supplementary Data. Cortexyme, Inc. Index to Financial Statements Audited Financial Statements Page Report of Independent Registered Public Accounting Firm 71 Balance Sheets 74 Statements of Operations and Comprehensive Loss 75 Statement of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 76 Statements of Cash Flows 77 Notes to Financial Statements 78 70 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Cortexyme, Inc. South San Francisco, California Opinion on the Financial Statements We have audited the accompanying balance sheets of Cortexyme, Inc. (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 changed its method of accounting for leases in 2019 due to the adoption of the Accounting Standards Codification Topic 842, “Leases.” Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the 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. 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. 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. 71 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 We have served as the Company's auditor since 2018. San Jose, California March 1, 2021 72 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 73 CORTEXYME, INC. BALANCE SHEETS (in thousands except share and per share data) December 31, 2020 December 31, 2019 ASSETS Current assets: Cash and cash equivalents $ 66,841 $ 51,214 Short term investments 66,979 48,650 Prepaid expenses and other current assets 4,042 6,192 Total current assets 137,862 106,056 Property and equipment, net 427 709 Operating lease right-of-use assets, net 674 625 Long term investments 50,464 16,763 Other assets 39 217 Total assets $ 189,466 $ 124,370 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 3,555 $ 3,075 Accrued expenses and other current liabilities 13,441 5,817 Total current liabilities 16,996 8,892 Long-term operating lease liability 208 — Total liabilities 17,204 8,892 Commitments and contingencies (See Note 7) Stockholders’ equity: Preferred stock, $0.001 par value, 10,000,000 authorized, no shares issued and 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 29 27 Additional paid in capital 318,574 185,196 Accumulated other comprehensive income 313 60 Accumulated deficit (146,654 ) (69,805 ) Total stockholders’ equity 172,262 115,478 Total liabilities and stockholders’ equity $ 189,466 $ 124,370 See accompanying notes to the financial statements 74 CORTEXYME, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands except for share and per share amounts) Year Ended December 31, 2020 2019 2018 Operating expenses: Research and development $ 61,307 $ 30,214 $ 10,085 General and administrative 17,586 8,954 2,034 Total operating expenses 78,893 39,168 12,119 Loss from operations (78,893 ) (39,168 ) (12,119 ) Interest income 2,044 2,188 806 Interest expense — — (957 ) Change in fair value of derivative liability — — (206 ) Net loss (76,849 ) (36,980 ) (12,476 ) Other comprehensive income / (loss): Unrealized gain / (loss) on available for sales securities 253 109 (49 ) Total comprehensive loss $ (76,596 ) $ (36,871 ) $ (12,525 ) Net loss per share - basic and diluted (2.63 ) (1.94 ) (3.71 ) Weighted average shares of common stock outstanding - basic and diluted 29,176,232 19,031,940 3,362,192 See accompanying notes to the financial statements 75 CORTEXYME, INC. STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands except share amounts) Series A Redeemable Convertible Preferred Stock Series B Redeemable Convertible Preferred Stock Common Stock Additional Paid in Other Comprehensive Accumulated Shareholders' Equity / Shares Amount Shares Amount Shares Amount Capital Income / (Loss) Deficit (Deficit) Balance January 1, 2018 9,008,919 $ 17,178 — $ — 3,361,016 $ 3 $ 66 $ — $ (20,349 ) $ (20,280 ) Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $157 — — 7,890,466 75,688 — — — — — — Issuance of Series B redeemable convertible preferred stock in connection with the conversion of convertible promissory notes and accrued interest — — 1,147,205 11,027 — — — — — — Issuance of Series B redeemable convertible preferred stock in connection with the facility lease agreement — — 114,437 — — — — — — — Vesting of Series B redeemable convertible preferred stock in lieu of rent — — — 153 — — — — — — Exercise of stock options — — — — 51,350 — 24 — — 24 Stock based compensation — — — — — — 155 — — 155 Other comprehensive loss — — — — — — — (49 ) — (49 ) Net loss — — — — — — — — (12,476 ) (12,476 ) Balance December 31, 2018 9,008,919 $ 17,178 9,152,108 $ 86,868 3,412,366 $ 3 $ 245 $ (49 ) $ (32,825 ) $ (32,626 ) Conversion of redeemable convertible preferred stock to common stock (9,008,919 ) (17,178 ) (9,152,108 ) (87,816 ) 18,161,027 18 104,976 — — 104,994 Vesting of Series B redeemable convertible preferred stock in lieu of rent — — — 948 — — — — — — Initial public offering of common stock, net of issuance costs of $8,427 — — — — 5,073,800 5 77,822 — — 77,827 Exercise of stock options — — — — 194,279 1 96 — — 97 Stock based compensation — — — — — — 2,056 — — 2,056 Exercise of stock warrant — — — — 27,941 — 1 — — 1 Other comprehensive income — — — — — — — 109 — 109 Net loss — — — — — — — — (36,980 ) (36,980 ) Balance December 31, 2019 — $ — — $ — 26,869,413 $ 27 $ 185,196 $ 60 $ (69,805 ) $ 115,478 Issuance of common stock in connection with private placement, net of issuance costs of $7,372 — — — — 2,500,000 2 117,626 — — 117,628 Exercise of stock options — — — — 173,809 — 1,282 — — 1,282 Stock based compensation — — — — — — 14,470 — — 14,470 Other comprehensive income — — — — — — — 253 — 253 Net loss — — — — — — — — (76,849 ) (76,849 ) Balance December 31, 2020 — $ — — $ — 29,543,222 $ 29 $ 318,574 $ 313 $ (146,654 ) $ 172,262 See accompanying notes to the financial statements 76 CORTEXYME, INC. STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2020 2019 2018 Cash flows from operating activities Net Loss $ (76,849 ) $ (36,980 ) $ (12,476 ) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash interest expense related to convertible promissory notes — — 263 Non-cash rent expense 367 367 153 Stock based compensation 14,470 2,056 155 Depreciation and amortization 332 188 51 Accretion of discount on convertible promissory notes payable — — 694 Amortization of premium / (discount) on available for sale investments 635 (812 ) (351 ) Change in fair value of derivative liability — — 206 Changes in operating assets and liabilities: Prepaid expenses and other current assets 2,184 (5,324 ) (690 ) Other assets 178 (207 ) 50 Accounts payable 480 2,580 (23 ) Accrued expenses and other current liabilities 7,385 4,855 273 Net cash used in operating activities (50,818 ) (33,277 ) (11,695 ) Cash flow from investing activities: Purchase of investments (187,141 ) (135,415 ) (55,242 ) Proceeds from maturities of investments 134,762 117,723 8,700 Purchase of property and equipment (52 ) (55 ) (212 ) Net cash used in investing activities (52,431 ) (17,747 ) (46,754 ) Cash flows from financing activities: Payments of finance leases (34 ) (559 ) — Proceeds from issuance of convertible promissory note payable — — 250 Proceeds from issuance of commons stock upon exercise of stock options 1,282 97 24 Proceeds from Series B redeemable convertible preferred stock, net of issuance costs — — 75,688 Proceeds from stock warrant exercise — 1 — Deferred initial public offering costs — — (34 ) Proceeds from initial public offering, net of stock offering costs — 77,827 — Proceeds from private placement offering, net of issuance costs 117,628 — — Net cash provided by financing activities 118,876 77,366 75,928 Net increase in cash and cash equivalents 15,627 26,342 17,479 Cash and cash equivalents at beginning of period 51,214 24,872 7,393 Cash and cash equivalents at end of period $ 66,841 $ 51,214 $ 24,872 Supplemental disclosures of non-cash information: Right-of-use assets obtained in exchange for new operating lease liabilities $ 620 $ 878 $ — Conversion of Series A redeemable convertible preferred stock to common stock on initial public offering $ — $ 17,178 $ — Conversion of Series B redeemable convertible preferred stock to common stock on initial public offering $ — $ 87,816 $ — Acceleration of vesting of Series B redeemable convertible preferred stock on initial public offering $ — $ 856 $ — Issuance of Series B redeemable convertible preferred stock in connection with conversion of convertible promissory notes and accrued interest $ — $ — $ 11,027 Issuance of Series B redeemable convertible stock for facility lease $ — $ — $ 1,100 See accompanying notes to the financial statements 77 CORTEXYME, INC. NOTES TO FINANCIAL STATEMENTS Note 1. Organization Description of Business Cortexyme, Inc. (the “Company”) was incorporated in the State of Delaware in June 2012 and is headquartered in South San Francisco, California. The Company is a clinical stage biopharmaceutical company focused on developing therapeutics based on data supporting a new theory of the cause of Alzheimer’s disease and other degenerative disorders. Cortexyme is targeting a specific, infectious pathogen tied to neurodegeneration and chronic inflammation in humans and animal models. Initial Public Offering On May 8, 2019, the Company’s registration statement on Form S-1 (File No. 333-230853) for its initial public offering of common stock (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”). On May 13, 2019, the Company closed its IPO with the sale of 5,073,800 shares of common stock, which included 661,800 shares of common stock issued upon the exercise in full of the underwriters’ option to purchase additional shares, at a public offering price of $17.00 per share, resulting in net proceeds of $77.8 million, after deducting underwriting discounts and commissions and estimated offering expenses paid by the Company. 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 The Company has incurred losses and negative cash flows from operations since inception and expects to continue to generate operating losses for the foreseeable future. As of December 31, 2020, the Company had an accumulated deficit of $146.7 million. 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. The Company may raise additional capital through the issuance of equity securities, debt financings or other sources in order to further implement its business plan. However, if such financing is not available when needed and at adequate levels, the Company will need to reevaluate its operating plan and may be required to delay the development of its product candidate. Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements and the notes thereto have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) pursuant to the instructions of the SEC on Form 10-K through the rules and interpretive releases of the SEC under federal securities law. 78 Use of Estimates 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, 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. The Company bases its estimates on historical experience and on various other market specific and other relevant assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from the Company’s estimates. Risk and Uncertainties The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of results of clinical trials and reaching milestones, uncertainty of regulatory approval of the Company’s potential drug candidates, uncertainty of market acceptance of the Company’s drug candidates, competition from substitute products and larger companies, securing and protecting proprietary technology, strategic relationships and dependence on key individuals and sole source suppliers. The Company’s drug candidate will require approvals from the U.S. Food and Drug Administration (FDA) and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any drug candidate will receive the necessary approvals. 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. Segments 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 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. Cash, Cash Equivalents and Investments The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents include marketable securities. Management determines the appropriate classification of its investments in debt securities at the time of purchase and at the end of each reporting period. Investments with original maturities beyond three months at the date of purchase and which mature at, or less than twelve months from the balance sheet date are classified as short-term investments. Investments with a maturity beyond twelve months from the balance sheet date are classified as long-term investments. Collectively, cash equivalents, short-term investments and long-term investments are considered available-for-sale and are recorded at fair value. 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 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” in the statements of operations and comprehensive loss. 79 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 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 3 years Lab equipment 5 years 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 3 years Concentration of Credit Risk Cash equivalents, short-term and long-term investments are financial instruments that potentially subject the Company to concentrations of credit risk. The Company invests in money market funds, repurchase agreements, treasury bills and notes, government bonds, commercial paper and corporate notes. The Company limits its credit risk associated with cash equivalents, short-term and long-term investments by placing them with banks and institutions it believes are highly credit worthy and in highly rated investments. Impairment of Long-Lived Assets The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment charge would be recorded when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value. The Company did not recognize any impairment charges for the years ended December 31, 2020, 2019 and 2018. Leases 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. See “Note 6. Leases” for further disclosure. 80 Research and Development Expenses Research and development costs are expensed as incurred. Research and development expenses consist primarily of personnel costs for the Company’s research and product development employees. Also included are non-personnel costs such as professional fees payable to third parties for preclinical and clinical studies and research services, laboratory supplies and equipment maintenance, product licenses, and other consulting costs. The Company estimates preclinical and clinical study and research expenses based on the services performed, pursuant to contracts with contract research organizations (“CROs”) that conduct and manage preclinical and clinical studies and research services on its behalf. Expenses related to clinical studies are based on estimates of the services received and efforts expended pursuant to contracts with many research institutions, clinical research organizations and other service providers that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee or unit price. Payments under the contracts are mainly driven by time and materials incurred by these service providers. 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, 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 Company periodically confirms the accuracy of estimates with the service providers and makes adjustments if necessary. Examples of estimated clinical expenses include: • fees paid to Contract Research Organizations, or CROs, in connection with clinical studies; • fees paid to investigative sites in connection with clinical studies; • fees paid to contract manufacturers in connection with the production of clinical study materials; and • fees paid to vendors in connection with preclinical development activities. If the actual timing of the performance of services or the level of effort varies from the original estimates, the Company will adjust the prepaid or accrual accordingly. Payments associated with licensing agreements to acquire exclusive licenses to develop, use, manufacture and commercialize products that have not reached technological feasibility and do not have alternate commercial use are expensed as incurred. Patent Costs The Company has no historical data to support a probable future economic benefit for the arising patent applications, filing and prosecution costs. Therefore, patent costs are expensed as incurred. Stock-Based Compensation 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 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 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. The fair value of a stock-based award is recognized over the period during which an optionee is required to provide services in exchange for the option award, known as the requisite service period (usually the vesting period) on a straight-line basis. Stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur. 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 The Company recorded all shares of convertible preferred stock at their respective fair values less issuance costs on the dates of issuance. 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, holders with 60% of majority had the right to demand redemption on or after May 23, 2025. 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 81 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, 20 20 and 2019 . Income Taxes The Company accounts for income taxes under the asset and liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized. The Company accounts for uncertain tax positions in accordance with ASC 740-10, Accounting for Uncertainty in Income Taxes . The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. The Company includes any penalties and interest expense related to income taxes as a component of other expense and interest expense, net, as necessary. Comprehensive Income (Loss) The Company is required to report all components of comprehensive income (loss), including net loss, in the financial statements in the period in which they are recognized. 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 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 Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration for potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares and common share equivalents of potentially dilutive securities outstanding for the period. For purposes of the diluted net loss per share calculation, redeemable convertible preferred stock, warrants and common stock options are considered to be potentially dilutive securities. 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 Adopted In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance changes disclosure requirements related to fair value measurements as part of the disclosure framework project. 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. 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. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40)”: 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. 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. 82 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. Note 3. Fair Value Measurements The fair value of our financial instruments reflects the amounts that we estimate we would receive in connection with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows: Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date; Level 2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active; Level 3 - Inputs that are unobservable. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying amounts of the Company’s financial instruments, which include cash, accounts payable and accrued liabilities and other current liabilities approximate their fair values due to their short maturities. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. During the years presented, the Company has not changed the manner in which it values assets and liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. 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, 2020 and 2019 are presented in the following tables (in thousands): Fair Value Measurements at December 31, 2020 Total Level 1 Level 2 Level 3 Money market funds $ 15,661 $ 15,661 $ — $ — Certificates of Deposit 30,765 — 30,765 — Repurchase Agreements 15,000 — 15,000 Corporate notes 75,426 — 75,426 — Government and agency notes 8,296 — 8,296 — Municipal notes 3,446 — 3,446 — Total $ 148,594 $ 15,661 $ 132,933 $ — 83 Fair Value Measurements at December 31, 2019 Total Level 1 Level 2 Level 3 Money market funds $ 30,054 $ 30,054 $ — $ — Certificates of Deposit 20,046 — 20,046 — Repurchase Agreements 15,000 — 15,000 — Corporate notes 38,783 — 38,783 — Government notes 7,574 — 7,574 — Commercial Paper 1,096 — 1,096 — Total $ 112,553 $ 30,054 $ 82,499 $ — Note 4: Cash, Cash Equivalents and Investments 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): December 31, 2020 2019 Cash and cash equivalents: Cash $ 35,690 $ 4,074 Money market funds 15,661 30,054 Repurchase agreements 15,000 15,000 Certificates of deposit 490 985 Corporate notes — 1,101 Total cash and cash equivalents $ 66,841 $ 51,214 Short-term investments: Commercial paper $ — $ 1,096 Certificates of deposit 23,387 15,428 Municipal notes 2,365 — Corporate notes 34,991 24,552 Government and agency notes 6,236 7,574 Total short-term investments $ 66,979 $ 48,650 Long-term investments Corporate notes $ 40,435 $ 13,130 Certificates of deposit 6,888 3,633 Municipal notes 1,081 — Government and agency notes 2,060 — Total long-term investments $ 50,464 $ 16,763 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 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. 84 The following table summarizes the available-for-sale securities (in thousands): Fair Value Measurements at December 31, 2020 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Money market funds $ 15,661 $ — $ — $ 15,661 Certificates of Deposit 30,603 162 — 30,765 Repurchase Agreements 15,000 — — 15,000 Corporate notes 75,298 183 (55 ) 75,426 Government and agency notes 8,274 22 — 8,296 Municipal notes 3,445 1 — 3,446 Total cash equivalents and investments $ 148,281 $ 368 $ (55 ) $ 148,594 Classified as: Cash equivalents (maturities within 90 days) $ 31,151 Short-term investments (maturities within one year) 66,979 Long-term investments (maturities beyond 1 year) 50,464 Total cash equivalents and investments $ 148,594 Fair Value Measurements at December 31, 2019 Amortized Cost Unrealized Gains Unrealized Losses Fair Value Money market funds $ 30,054 $ — $ — $ 30,054 Certificates of Deposit 19,992 54 — 20,046 Repurchase Agreements 15,000 — — 15,000 Corporate notes 38,788 — (5 ) 38,783 Government notes 7,563 11 7,574 Commercial Paper 1,096 — — 1,096 Total cash equivalents and investments $ 112,493 $ 65 $ (5 ) $ 112,553 Classified as: Cash equivalents (maturities within 90 days) $ 47,140 Short-term investments (maturities within one year) 48,650 Long-term investments (maturities beyond 1 year) 16,763 Total cash equivalents and investments $ 112,553 Note 5: Balance Sheet Components Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consisted of the following (in thousands): December 31, 2020 2019 Prepaid expenses $ 274 $ 129 Prepaid insurance 964 858 Prepaid research and development expenses 2,110 4,517 Other current assets 694 688 Total prepaid expenses and other current assets $ 4,042 $ 6,192 85 Property and equipment, net Property and equipment, net consisted of the following (in thousands): December 31, 2020 2019 Computer equipment $ 33 $ 28 Lab equipment 405 405 Finance lease right of use assets 557 559 Leasehold improvement 21 — Office furniture 26 — Less: accumulated amortization and depreciation (615 ) (283 ) Property and equipment, net $ 427 $ 709 Depreciation expense for property and equipment was $332,000, $188,000 and $51,000 for the years ended December 31, 2020, 2019, and 2018, respectively. Accrued Liabilities Accrued liabilities consisted of the following (in thousands): December 31, 2020 2019 Personnel expenses $ 2,415 $ 1,261 Professional fees 141 96 Research and development expenses 10,603 4,410 Other 282 50 Total accrued expenses and other current liabilities $ 13,441 $ 5,817 Note 6. Leases Real Estate Operating Leases 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. The Company issued 114,437 shares of its Series B redeemable convertible preferred stock with a fair value of $1.1 million in exchange for the leased facility. No other payments are due under the lease. The common area maintenance and other operating costs are included in the base rent. 100% of the issued shares were initially subject to a repurchase option. Pursuant to the terms of the lease, each month beginning on the one-month anniversary of the commencement date of the lease, 1/36 th of the total shares are released from the repurchase option until all shares are released over the lease period of three years. 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. 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. Under the terms of the amendment, the Company paid a one-time fee of approximately $63,000 for the additional space and the lease agreement will terminate in July 2021. No other payments are due under the lease agreement and no renewal option is available. 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 . 86 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, 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 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 $ 674 $ 625 Short-term operating lease liability 238 — Long-term operating lease liability 208 — $ 446 $ — Finance lease right of use asset 557 559 Finance lease accumulated amortization (337 ) (107 ) Total finance lease right of use asset, net $ 220 $ 452 Weighted average remaining lease term Operating leases 1.6 years 1.6 years Finance leases 0.9 years 2.1 years Weighted average discount rate Operating leases 2.10 % — % Finance leases — % — % Year ended December 31, Operating Lease 2021 245 2022 141 2023 70 Total lease payments 456 Less: imputed interest (10 ) Total remaining lease liability 446 87 Lease costs for the years ended December 31, 2020 and 2019 were approximately: Years ended December 31, 2020 2019 Lease costs: Finance lease amortization of right of use assets $ 230 $ 107 Operating lease costs 578 374 Short-term lease costs 92 11 Total lease costs $ 900 $ 492 For the year ended December 31, 2018, rent expense under operating leases computed under the previous accounting method, ASC 840, Leases, was approximately $387,000. Note 7. Commitments and Contingencies Legal Matters The Company’s industry is characterized by frequent claims and litigation, including claims regarding intellectual property. As a result, the Company may be subject to various legal proceedings from time to time. The results of any future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors. Management is not aware of any pending or threatened litigation. Indemnification As permitted under Delaware law and in accordance with the Company’s bylaws, the Company is required to indemnify its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its directors. 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, 2020 and 2019. Contingencies From time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. We accrue a liability for such matters when it is probable that future expenditures will be made, and such expenditures can be reasonably estimated. Note 8. Common Stock and Common Stock Warrant Common Stock The Company had reserved shares of common stock for future issuance as follows: December 31, 2020 2019 Options issued and outstanding under the 2019 Stock Plan 5,465,327 2,393,934 Shares available for issuance under 2019 Stock Plan 269,353 2,439,779 Shares available for issuance under the Employee Stock Purchase Plan 536,989 268,295 Total 6,271,669 5,102,008 The Company is authorized to issue 100,000,000 shares of common stock with a par value of $0.001 per share. Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when and if declared by the board of directors, subject to the prior rights of holders of any preferred stock that may be outstanding at the time. The Company has never declared any dividends on common stock. As of December 31, 2020, and 2019, the Company had 29,543,222 and 26,869,413 shares of common stock issued and outstanding, respectively. 88 Common Stock Warrant In June 2014, in connection with a research grant and license agreement, the Company issued a warrant to purchase 27,941 shares of common stock at $0.03 per share. The grant date estimated fair value of such warrants was insignificant. The warrant was immediately exercisable and expires in June 2024. The warrant was fully exercised in May 2019. Note 9. 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. The 2014 Plan was amended, restated and re-named the 2019 Equity Incentive Plan (the “2019 Plan”), which became effective as of May 7, 2019, the day prior to the effectiveness of the registration statement filed in connection with the IPO. The remaining shares available for issuance under the 2014 Plan were added to the shares reserved for issuance under the 2019 Plan. The 2019 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, RSUs, performance units, and performance shares to the Company’s employees, directors, and consultants. The maximum aggregate number of shares that may be issued under the 2019 Plan is 5,131,549 shares of the Company’s common stock. In addition, the number of shares available for issuance under the 2019 Plan will be annually increased on the first day of each of its fiscal years beginning with fiscal 2020, by an amount equal to the least of (i) 2,146,354 shares of common stock; (ii) 4% of the outstanding shares of its common stock as of the last day of its immediately preceding fiscal year; 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 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. Stock Options Activity for service-based stock options under the 2019 Plan is as follows: Number of Options and Unvested Shares Weighted Average Exercise Price Weighted average remaining contractual life (years) Aggregate intrinsic value (In thousands) Balance at December 31, 2017 769,409 $ 0.39 8.89 $ 1,108 Options granted 1,316,342 2.08 — — Options exercised (51,350 ) 0.46 — — Options cancelled / forfeited (148,897 ) 0.41 — — Balance at December 31, 2018 1,885,504 $ 1.57 9.07 $ 1,253 Options granted 932,639 15.87 — — Options exercised (194,279 ) 0.51 — — Options cancelled / forfeited (229,930 ) 21.09 — — Balance at December 31, 2019 2,393,934 $ 5.35 8.62 $ 121,593 Options granted 2,798,645 42.95 — — Options exercised (173,809 ) 7.38 — — Options cancelled / forfeited (228,443 ) 42.56 — — Balance at December 31, 2020 4,790,327 $ 25.47 8.69 $ 49,723 Options vested and expected to vest to December 31, 2020 4,790,327 25.47 8.69 49,723 Options exercisable at December 31, 2020 1,471,526 $ 10.32 7.64 $ 30,633 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 $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. 89 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 Weighted Average Exercise Price Weighted average remaining contractual life (years) Balance at December 31, 2019 — — — Options granted 675,000 29.60 — Options exercised — — — Options cancelled — — — Balance at December 31, 2020 675,000 29.60 9.94 Outstanding 675,000 $ 29.60 9.94 Vested — — — 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): 2020 2019 2018 General and administrative expense $ 7,441 $ 1,378 $ 78 Research and development expense 7,029 678 77 Total stock-based compensation $ 14,470 $ 2,056 $ 155 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 the 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 calculate the fair value of stock-based compensation for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Expected volatility 86.69 % 80.19 % 69.6 % Expected dividend yield — % — % — % Expected term (in years) 6.23 6.25 6.25 Risk-free interest rate 0.80 % 1.90 % 2.91 % 90 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 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. Risk-Free Interest Rate — The risk-free rate assumption is based on the U.S. Treasury instruments with maturities similar to the expected term of the Company’s stock options. Expected Dividend — The Company has not issued any dividends in its history and does not expect to issue dividends over the life of the options and therefore has estimated the dividend yield to be zero. Fair value of Common Stock — The fair value of the shares of common stock underlying the stock-based awards has historically been determined by the board of directors, with input from management. Prior to the Company’s IPO, there has been no public market for the Company’s common stock, the board of directors determined the fair value of the common stock on the grant-date of the stock-based award by considering a number of objective and subjective factors, including enterprise valuations of the Company’s common stock performed by an unrelated third-party specialist, valuations of comparable companies, sales of the Company’s redeemable convertible preferred stock to unrelated third parties, operating and financial performance, the lack of liquidity of the Company’s capital stock, and general and industry-specific economic outlook. Subsequent to the IPO date, the board of directors uses the closing price of stock on the date of grant to determine the fair value. 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. 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 95.0 % Contractual term, in years 10 Risk-free interest rate 0.90 % Employee Stock Purchase Plan On April 24, 2019, the Company’s Board of Directors adopted its 2019 Employee Stock Purchase Plan (“2019 ESPP”), which was subsequently approved by the Company’s stockholders and became effective on May 7, 2019, the day immediately prior to the effectiveness of the registration statement filed in connection with the IPO. The 2019 ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code (the “Code”) for U.S. employees. In addition, the 2019 ESPP authorizes grants of purchase rights that do not comply with Section 423 of the Code under a separate non-423 component for non-U.S. employees and certain non-U.S. service providers. The Company has reserved 268,295 shares of common stock for issuance under the 2019 ESPP. In addition, the number of shares reserved for issuance under the 2019 ESPP will be increased automatically on the first day of each fiscal year for a period of up to ten years, starting with the 2020 fiscal year, by a number equal to the lesser of: (i) 536,589 shares; (ii) 1% of the shares of common stock outstanding on the last day of the prior fiscal year; or (iii) such lesser number of shares determined by the Company’s Board of Directors. The 2019 ESPP is expected to be implemented through a series of offerings under which participants are granted purchase rights to purchase shares of the Company’s common stock on specified dates during such offerings. The Company has not yet approved an offering under the 2019 ESPP. 91 Note 10 . Convertible Promissory Notes In February 2017 the Company received $7.6 million from the issuance of convertible promissory notes to the Company’s current investors. In June 2017 the Company received an additional $150,000 from an issuance under the same note facility to a new investor. In January 2018 the Company received $250,000 from a new investor under the same note facility for a total of $8.0 million in principal value under the note facility. The notes accrue simple interest on the outstanding principal amount at the rate of 8% per annum and were set to mature on February 1, 2019. The convertible promissory notes have conversion and repayment options as follows: (a) in the event that the Company has an equity financing event of at least $10 million to new investors on or before the maturity date, then the outstanding principal amount of this convertible promissory note and any unpaid accrued interest will automatically convert in whole into equity securities sold in the qualified financing at a conversion price equal to 80% of the cash price paid per share for equity securities by the investors in the qualified financing, or (b) the Company consummates a merger of the Company where it does not maintain majority voting power or conducts a sale, lease, transfer, exclusive license or other disposition of all or substantially all of its assets while the convertible promissory notes remain outstanding, the Company shall repay the holders in cash in an amount equal to 200% of the outstanding principal and accrued interest amount of the convertible promissory notes. The Company evaluated its convertible notes and determined that the redemption premium feature qualified as a derivative liability to be separately accounted for in accordance with ASC 815. The convertible promissory notes contained put options as follows: 1. On or before the maturity date, the principal and accrued interest of the notes will automatically convert into equity securities issued and sold in the initial closing of the Company’s next qualified equity financing with gross proceeds of at least $10,000,000, exclusive of the conversion of the notes. The number of shares to be issued to the note holders will be equal to dividing the outstanding principal and any unpaid accrued interest by 80% of the price paid per share of the next equity security sold to investors. The discount in share price to note holders is not considered clearly and closely related to the debt host and results in an embedded derivative that must be bifurcated and accounted for separately from the debt host. 2. In the event of a merger or sale, lease, transfer, exclusive license or other disposition of all or substantially all of its assets prior to repayment, the outstanding principal and unpaid accrued interest will be repaid in cash, plus a repayment premium equal to 100% of the outstanding principal and accrued interest at the time of the merger or sale of assets. The premium to note holders is not considered clearly and closely related to the debt host and results in an embedded derivative that must be bifurcated and accounted for separately from the debt host. Accordingly, upon the issuance of the February 2017 convertible promissory notes, the estimated fair value of the embedded derivative liability was determined using a bond plus option valuation model and assuming a probability of 80% that a qualified financing would occur and a zero probability that a merger or sale would occur. The Company recorded the estimated fair value of these put options (embedded derivatives) as a liability of $1.55 million with an offsetting amount recorded as debt discount, which offsets the carrying amount of the debt. The debt discount is amortized over the debt’s expected term. The derivative liability is revalued at the end of each reporting period and any change in fair value is recognized in other income. Upon the issuance of the June 2017 convertible promissory notes, the estimated fair value of the embedded derivatives were determined using a bond plus option valuation model and assuming a probability of 80% that a qualified financing would occur and a zero probability that a sale or merger would occur. The Company recorded the estimated fair value of these put options (embedded derivatives) as a liability of $30,000 with an offsetting amount recorded as debt discount, which offsets the carrying amount of the debt. Upon issuance of the January 2018 convertible promissory notes, the estimated fair value of the embedded derivatives was determined using a bond plus option valuation model and assuming a probability of 90% that a qualified financing would occur and a zero probability that a merger or sale would occur. The Company recorded the estimated fair value of these put options (embedded derivatives) as a liability of $56,250 with an offsetting amount recorded as debt discount, which offsets the carrying amount of the debt. The derivative liability is revalued at the end of each reporting period and any change in fair value is recognized in “Change in fair value of redemption premium liability” in the Statement of Operations. In May 2018, the notes converted into 1,147,205 shares of the Company’s Series B redeemable convertible preferred stock in conjunction with the Company’s Series B redeemable convertible preferred stock financing (the “Series B Financing”), which was considered a Qualified Financing under the terms of the notes. In conjunction with the closing, the holders of the notes also converted their accrued and unpaid interest of $0.8 million and the Company recorded a change in the fair value of the derivative liability of $206,000. 92 Note 1 1 . Related Party Transactions In June 2014, the Company entered into a research grant and license agreement (the Agreement) with a stockholder of the Company. The Agreement requires the Company to pay royalties to the stockholder in the amount of 3% of gross revenues not to exceed $1.05 million. This agreement was amended in April 2019 and the royalty payment provision was removed. 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. Note 12. Income taxes 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. The Company did not record a provision (benefit) for income taxes for the years ended December 31, 2020, 2019 and 2018. The provision for income taxes differs from the amount expected by applying the federal statutory rate to the loss before taxes as follows: Year ended December 31, 2020 2019 2018 Federal statutory income tax rate 21.00 % 21.00 % 21.00 % State income taxes 0.55 (1.12 ) 6.24 Income tax credits 2.14 3.67 — Non-deductible expenses and others 0.44 (0.38 ) (1.02 ) Non-deductible expenses related to the convertible promissory notes — — (1.96 ) Change in valuation allowance (24.13 ) (23.17 ) (24.26 ) — % — % — % As of December 31, 2020 and 2019, the components of the Company’s deferred tax assets are as follows (in thousands): Year ended December 31, 2020 2019 Deferred tax asset: Federal and State net operating loss carryforwards $ 28,072 $ 14,219 Stock based compensation 2,633 238 Other accruals and deferred expense 566 185 Tax credits 3,928 1,867 Gross deferred tax asset 35,199 16,509 Valuation allowance (35,034 ) (16,489 ) Total deferred tax assets 165 20 Deferred tax liabilities: Property and equipment (14 ) (20 ) Capitalized leases (151 ) — Gross deferred tax liabilities (165 ) (20 ) Net deferred tax assets $ — $ — 93 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 carryforwards. The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is more likely than not that the deferred tax assets will be realized; 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 $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 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. tax law and similar state provisions. 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 The Company follows the provisions of the FASB ASC 740-10, Accounting for Uncertainty in Income Taxes. ASC 740-10 prescribes a comprehensive model for the recognition, measurement, presentation and disclosure in financial statements of uncertain tax positions that have been taken or expected to be taken on a tax return. No liability related to uncertain tax positions is recorded in the financial statements. The Company is subject to taxation in the United States. 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, 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): Year ended December 31, 2020 2019 2018 Beginning balance $ 1,059 $ 356 $ 171 Additions for tax positions taken in a prior year — 168 — Additions for tax positions taken in a current year 917 535 185 Ending balance $ 1,976 $ 1,059 $ 356 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. 94 Note 13. Net Loss per Share The following table sets forth the computation of basic and diluted net loss per share (in thousands except for share and per share amounts): December 31, 2020 2019 2018 Numerator: Net loss $ (76,849 ) $ (36,980 ) $ (12,476 ) Denominator Weighted average common shares outstanding 29,176,232 19,031,940 3,362,192 Net loss per share, basic and diluted $ (2.63 ) $ (1.94 ) $ (3.71 ) The following outstanding potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive: December 31, 2020 2019 2018 Series A convertible preferred stock — — 9,008,919 Series B convertible preferred stock — — 9,152,108 Stock options issued and outstanding 4,790,327 2,393,934 1,885,504 Performance stock options 675,000 — — Warrants — — 27,941 5,465,327 2,393,934 20,074,472 Note 14. Employee Benefit Plan The Company sponsors a 401(k) defined contribution plan for its employees. This plan provides for pre-tax and post-tax contributions for all employees. Employee contributions are voluntary. Employees may contribute up to 100% of their annual compensation to this plan, as limited by an annual maximum amount as determined by the Internal Revenue Service. 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, 2020, 2019, and 2018, respectively. 95 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None