SPRUCE BIOSCIENCES, INC. 10-Q

Item 1. Financial Statements SPRUCE BIOSCIENCES, INC. CONDENSED BALANCE SHEETS (unaudited) (in thousands, except share amounts) September 30, 2021 December 31, 2020 ASSETS Current assets: Cash and cash equivalents $ 58,363 $ 157,150 Short-term investments 33,957 — Prepaid expenses 1,301 2,971 Other current assets 301 276 Total current assets 93,922 160,397 Restricted cash 216 216 Right-of-use assets, net 1,559 1,793 Long-term investments 38,975 — Other assets 415 477 Total assets $ 135,087 $ 162,883 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 2,128 $ 3,628 Term loan, current portion — 2,554 Accrued expenses and other current liabilities 5,924 2,496 Accrued compensation and benefits 1,009 1,085 Total current liabilities 9,061 9,763 Term loan, net of current portion 4,867 1,922 Lease liability, net of current portion 1,388 1,653 Other liabilities 51 118 Total liabilities 15,367 13,456 Commitments and contingencies (Note 8) Stockholders’ equity: Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized, and no shares issued and outstanding as of September 30, 2021 and December 31, 2020 — — Common stock, $ 0.0001 par value, 200,000,000 shares authorized, 23,379,887 and 23,260,399 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively 3 2 Additional paid-in capital 213,682 210,266 Accumulated other comprehensive loss ( 16 ) — Accumulated deficit ( 93,949 ) ( 60,841 ) Total stockholders’ equity 119,720 149,427 Total liabilities and stockholders’ equity $ 135,087 $ 162,883 See accompanying notes to the condensed financial statements. 1 Table of Contents SPRUCE BIOSCIENCES, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited) (in thousands, except share and per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating expenses: Research and development $ 8,607 $ 7,769 $ 24,440 $ 18,040 General and administrative 2,793 1,790 8,491 3,041 Total operating expenses 11,400 9,559 32,931 21,081 Loss from operations ( 11,400 ) ( 9,559 ) ( 32,931 ) ( 21,081 ) Interest expense ( 88 ) ( 79 ) ( 257 ) ( 245 ) Other income, net 41 51 80 125 Net loss $ ( 11,447 ) $ ( 9,587 ) $ ( 33,108 ) $ ( 21,201 ) Unrealized gain/(loss) on available for sale securities 13 - ( 16 ) - Comprehensive loss $ ( 11,434 ) $ ( 9,587 ) $ ( 33,124 ) $ ( 21,201 ) Net loss per share, basic and diluted $ ( 0.49 ) $ ( 12.35 ) $ ( 1.42 ) $ ( 27.54 ) Weighted-average shares of common stock outstanding, basic and diluted 23,367,140 776,159 23,330,399 769,766 See accompanying notes to the condensed financial statements. 2 Table of Contents SPRUCE BIOSCIENCES, INC. CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (unaudited) (in thousands, except share amounts) Additional Accumulated Other Total Common Stock Paid-In Comprehensive Accumulated Stockholders' Shares Amount Capital Loss Deficit Equity Balance as of June 30, 2021 23,370,070 3 212,634 ( 29 ) ( 82,502 ) 130,106 Exercise of stock options 9,817 — 17 — — 17 Stock-based compensation — — 1,031 — — 1,031 Unrealized loss on available for sale securities — — — 13 13 Net loss — — — ( 11,447 ) ( 11,447 ) Balance as of September 30, 2021 23,379,887 $ 3 $ 213,682 $ ( 16 ) $ ( 93,949 ) $ 119,720 Balance as of January 1, 2021 23,260,399 $ 2 $ 210,266 $ — $ ( 60,841 ) $ 149,427 Exercise of stock options 109,361 1 159 — — 160 Issuance of common stock related to employee stock purchase plan 10,127 — 96 — — 96 Stock-based compensation — — 3,161 — — 3,161 Unrealized loss on available for sale securities — — — ( 16 ) — ( 16 ) Net loss — — — — ( 33,108 ) ( 33,108 ) Balance as of September 30, 2021 23,379,887 $ 3 $ 213,682 $ ( 16 ) $ ( 93,949 ) $ 119,720 See accompanying notes to the condensed financial statements. 3 Table of Contents SPRUCE BIOSCIENCES, INC. CONDENSED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT (unaudited) (in thousands, except share amounts) Redeemable Convertible Preferred Stock Additional Total Series A Series B Common Stock Paid-In Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Balance as of June 30, 2020 28,000,000 27,813 36,666,665 43,648 771,574 1 800 ( 42,916 ) ( 42,115 ) Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $ 15 — — 36,666,665 43,985 — — — — — Exercise of stock options — — — — 50,448 — 43 — 43 Stock-based compensation — — — — — — 218 — 218 Net loss — — — — — — — ( 9,587 ) ( 9,587 ) Balance as of September 30, 2020 28,000,000 $ 27,813 73,333,330 $ 87,633 822,022 $ 1 $ 1,061 $ ( 52,503 ) $ ( 51,441 ) Balance as of January 1, 2020 28,000,000 $ 27,813 — $ — 764,408 $ 1 $ 664 $ ( 31,302 ) $ ( 30,637 ) Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $ 15 — — 73,333,330 87,633 — — — — — Exercise of stock options — — — — 57,614 — 51 — 51 Stock-based compensation — — — — — — 346 — 346 Net loss — — — — — — — ( 21,201 ) ( 21,201 ) Balance as of September 30, 2020 28,000,000 $ 27,813 73,333,330 $ 87,633 822,022 $ 1 $ 1,061 $ ( 52,503 ) $ ( 51,441 ) See accompanying notes to the condensed financial statements. 4 Table of Contents SPRUCE BIOSCIENCES, INC. CONDENSED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities Net loss $ ( 33,108 ) $ ( 21,201 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock-based compensation expense 3,161 346 Depreciation and amortization 48 26 Amortization of premium on available for sale securities 60 — Non-cash lease expense 233 26 Changes in operating assets and liabilities: Prepaid expenses and other current assets 1,738 ( 905 ) Accounts payable and accrued expenses 1,829 3,731 Accrued compensation and benefits ( 76 ) ( 201 ) Other assets 131 ( 161 ) Other liabilities ( 94 ) 86 Net cash used in operating activities ( 26,078 ) ( 18,253 ) Cash flows from investing activities Purchases of property and equipment ( 87 ) ( 50 ) Purchase of investments ( 73,098 ) — Net cash used in investing activities ( 73,185 ) ( 50 ) Cash flows from financing activities Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs — 87,633 Payment of deferred offering costs — ( 931 ) Proceeds from exercise of stock options 160 51 Proceeds from issuance of common stock related to employee stock purchase plan 96 — Proceeds from issuance of long-term debt, net of issuance costs of $ 10 4,990 — Repayment of term loan ( 4,770 ) — Net cash provided by financing activities 476 86,753 Net increase/(decrease) in cash, cash equivalents and restricted cash ( 98,787 ) 68,450 Cash, cash equivalents, and restricted cash at beginning of period 157,366 3,924 Cash, cash equivalents, and restricted cash at end of period $ 58,579 $ 72,374 Supplemental cash flow data: Cash paid for interest $ 152 $ 144 Supplemental disclosure of non-cash investing and financing activities: Right-of-use assets recognized in exchange for lease liabilities $ — $ 1,894 Deferred offering costs included in accounts payable and accrued expenses $ — $ 1,416 Property and equipment included in accounts payable $ — $ 14 See accompanying notes to the condensed financial statements. 5 Table of Contents SPRUCE BIOSCIENCES, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS (unaudited) 1. Organization and Principal Activities Description of Business Spruce Biosciences, Inc. (the Company) is a late-stage biopharmaceutical company focused on developing and commercializing novel therapies for rare endocrine disorders with significant unmet medical need. The Company is initially developing its wholly-owned product candidate, tildacerfont, as the potential first non-steroidal therapy for patients suffering from classic congenital adrenal hyperplasia (CAH). The Company is also developing tildacerfont for females suffering from polycystic ovary syndrome (PCOS) with adrenal dysfunction. The Company is located in Daly City, California and was incorporated in the state of Delaware in April 2016. Initial Public Offering In October 2020, the Company consummated its initial public offering (IPO) and issued a total of 6,900,000 shares of common stock, which included 900,000 shares of common stock issued pursuant to the exercise of the underwriters’ option to purchase additional shares, at an offering price of $ 15.00 per share. In aggregate, the Company received net proceeds of $ 93.4 million, after deducting underwriting discounts, commissions and offering expenses. Upon the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock automatically converted into 15,492,019 shares of common stock. Liquidity and Capital Resources As of September 30, 2021, the Company had cash, cash equivalents and investments of $ 131.3 million, which is sufficient to fund its planned operations for a period of at least twelve months following the issuance of the accompanying condensed financial statements. The Company has incurred significant losses and negative cash flows from operations. During the nine months ended September 30, 2021, the Company incurred a net loss of $ 33.1 million and used $ 26.1 million of cash in operations. As of September 30, 2021, the Company had an accumulated deficit of $ 93.9 million and does not expect positive cash flows from operations in the foreseeable future. The Company has funded its operations primarily through the issuance and sale of equity securities and debt. The Company anticipates that it will need to raise substantial additional financing in the future to fund its operations. In order to meet these additional cash requirements, the Company may seek to sell additional equity or issue debt, convertible debt or other securities that may result in dilution to its stockholders. If the Company raises additional funds through the issuance of debt or convertible debt securities, these securities could have rights senior to those of its shares of common stock and could contain covenants that restrict its operations. There can be no assurance that the Company will be able to obtain additional equity or debt financing on terms acceptable to it, if at all. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting the Company’s ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. The Company’s failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on its business, results of operations, and financial condition. 2. Summary of Significant Accounting Policies Interim Condensed Financial Statements The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and applicable rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim reporting. As permitted under those rules and regulations, certain notes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed balance sheet as of September 30, 2021, the condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2021 and 2020, the condensed statement of stockholders’ equity for the nine months ended September 30, 2021, the condensed statement of redeemable convertible preferred stock and stockholders’ deficit for the nine months ended September 30, 2020, and the condensed statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited. The interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal, recurring adjustments that are necessary to present fairly the Company’s results for the interim periods presented. The condensed balance sheet as of December 31, 2020, is derived from the Company’s audited financial statements. The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021, or for any other future annual or interim period. 6 Table of Contents These interim condensed financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 22, 2021 (Annual Report) . Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses as well as related disclosure of contingent assets and liabilities. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, accrued research and development expenses, valuation of common stock and stock-based compensation and income tax and uncertain tax positions. The Company bases its estimates on its historical experience and on assumptions that it believes are reasonable; however, actual results could significantly differ from those estimates. Risks and Uncertainties Any product candidates developed by the Company will require approvals from the U.S. Food and Drug Administration (FDA) or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s current and future product candidates will meet desired efficacy and safety requirements to obtain the necessary approvals. If approval is denied or delayed, it may have a material adverse impact on the Company’s business and its financial statements. The Company is subject to a number of risks similar to other late-stage biopharmaceutical companies including, but not limited to, dependency on the clinical and commercial success of the Company’s product candidate, tildacerfont, ability to obtain regulatory approval of tildacerfont, the need for substantial additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians and consumers, significant competition and untested manufacturing capabilities, and dependence on key individuals and sole source suppliers. The Company’s business has been and could continue to be adversely affected by the evolving COVID-19 pandemic. For example, the COVID-19 pandemic has resulted in and could result in delays to the Company’s clinical trials for numerous reasons including additional delays or difficulties in enrolling patients, diversion of healthcare resources away from the conduct of clinical trials, interruption or delays in the operations of the FDA or other regulatory authorities, and delays in clinical sites receiving the supplies and materials to conduct our clinical trials. At this time, the extent to which the COVID-19 pandemic impacts the Company’s business will depend on future developments, which are highly uncertain. The Company will continue to evaluate the impact that these events could have on its future operations, financial position, results of operations and cash flows. Significant Accounting Policies There have been no significant changes to the accounting policies during the nine months ended September 30, 2021, as compared to the significant accounting policies described in our Annual Report. Restricted Cash The Company has cash in a collateral account related to a letter of credit issued on behalf of the Company for the security deposit on the non-cancelable operating lease for an office facility. The collateralized cash in connection with the letter of credit was classified as restricted cash on the balance sheet as of September 30, 2021 and December 31, 2020 based on the terms of the lease agreement, which expires in 2025, unless extended. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed statements of cash flows (in thousands): September 30, 2021 2020 Cash and cash equivalents $ 58,363 $ 72,158 Restricted cash 216 216 Total cash, cash equivalents and restricted cash $ 58,579 $ 72,374 Emerging Growth Company Status The Company is an emerging growth company (EGC) as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards. Recent Accounting Pronouncements Not Yet Adopted 7 Table of Contents In June 2016, the Financial Accounting Standards Board ( FASB ) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for non-EGC’s electing to use the extended transition period for complying with new or revised accounting standards for fiscal years beginning after December 15, 2019, and for EGC’s for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company expects to adopt this ASU on January 1, 2023. The Company is currently assessing the impact of adopting this standard, but based on a preliminary assessment, does not expect the adoption of this guidance to have a material impact on its financial statements . Recently Adopted Accounting Pronouncements In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12 , Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 are intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020 and the Company adopted on January 1, 2021 . The adoption did not have any impact on the Company’s condensed financial statements as of and for the nine months ended September 30, 2021. 3. Cash Equivalents and Investments The Company considers all highly liquid investments with remaining maturities at the date of purchase of three months or less to be cash equivalents. Cash equivalents consist of amounts invested in money market funds and are stated at fair value. Investments comprise U.S. treasury securities, commercial paper, and corporate bonds, which are classified as available for sale debt securities. The following table is a summary of amortized cost, unrealized gains and losses, and fair value (in thousands): September 30, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Money market funds $ 50,039 $ — $ — $ 50,039 Total cash equivalents 50,039 — — 50,039 Commercial papers 33,957 — — 33,957 Total short-term investments 33,957 — — 33,957 Corporate bonds 14,802 — ( 8 ) 14,794 U.S. treasury securities 24,189 — ( 8 ) 24,181 Total long-term investments 38,991 — ( 16 ) 38,975 Total cash equivalents and available for sale securities $ 122,987 $ — $ ( 16 ) $ 122,971 As of September 30, 2021, the weighted-average remaining contractual maturities of available for sale securities was approximately 16 months. There have been no realized gains or losses on available for sale securities for the periods presented. No available for sale securities held as of September 30, 2021 have been in a continuous unrealized loss position for more than 12 months, and unrealized gains and losses are included in “accumulated other comprehensive loss” within stockholders' equity on the condensed balance sheets. As of September 30, 2021, unrealized losses on available for sale securities are not attributed to credit risk and are considered temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the cost basis of the investment will be recovered. The Company believes it has no other-than-temporary impairments on its securities as it does not intend to sell these securities and does not believe it is more likely than not that it will be required to sell these securities before the recovery of their amortized cost basis. To date, the Company has not recorded any impairment charges on securities related to other-than-temporary declines in fair value. The Company’s cash equivalents and short-term investments are due within one year . 4. Fair Value Measurements The Company measures and reports certain financial instruments as assets at fair value. 8 Table of Contents Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows: Level 1—Quoted prices in active markets for identical assets and liabilities; Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The carrying value of cash and cash equivalents, prepaid expenses, accounts payable, term loan, and accrued expenses are generally considered to be representative of their respective fair values because of the short-term nature of those instruments. The following table summarizes the Company's financial assets measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands): September 30, 2021 Total Level 1 Level 2 Level 3 Money market funds $ 50,039 $ 50,039 $ — $ — Total cash equivalents 50,039 50,039 — — Commercial paper 33,957 — 33,957 — Total short-term investments 33,957 — 33,957 — Corporate bonds 14,794 14,794 — — U.S. treasury securities 24,181 24,181 — — Total long-term investments 38,975 38,975 — — Total cash equivalents, short-term investments and long-term investments $ 122,971 $ 89,014 $ 33,957 $ — The Company did no t have any financial assets nor liabilities recorded at fair value on a recurring or non-recurring basis as of December 31, 2020. For Level 1 investments, the Company uses quoted prices in active markets for identical assets to determine the fair value. For Level 2 investments, the Company uses quoted prices for similar assets sourced from certain third-party pricing services. The third-party pricing services generally utilize industry standard valuation models for which all significant inputs are observable, either directly or indirectly, to estimate the price or fair value of the securities. The primary input generally includes reported trades of or quotes on the same or similar securities. The Company does not make additional judgments or assumptions made to the pricing data sourced from the third-party pricing services. The estimated fair value of the term loan was $ 5.0 million as of September 30, 2021 and was based on estimated interest rates currently available to the Company for debt with similar terms, a Level 3 input. 5. Balance Sheet Components Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following (in thousands): September 30, 2021 December 31, 2020 Accrued research and development expenses $ 5,094 $ 2,002 Accrued general and administrative expenses 480 245 Lease liability, current portion 350 249 Total accrued expenses and other current liabilities $ 5,924 $ 2,496 9 Table of Contents Accrued research and development expenses were primarily related to clinical trials, non-clinical studies, and manufacturing of clinical drug supply. 6. Leases The Company leases space under non-cancelable operating lease, which require the Company to pay base rent, real estate taxes, insurance, general repairs, and maintenance. The Company does not have finance leases. In February 2020, the Company entered into a non-cancelable operating lease for office space with a commencement date of September 2020 . The monthly payments escalate over the 63 -month term with total gross commitments of $ 2.3 million. The lease includes an option to renew the lease term for an additional period of 60 months. The renewal option is not included in the lease term or minimum lease payments disclosures below as the Company is not reasonably certain to exercise the option. Lease incentives, which relate to rent abatement, were considered in the calculation of the lease liability and right-of-use asset. Lease expense for the three and nine months ended September 30, 2021 was $ 0.1 million and $ 0.3 million, respectively. In February 2019, the Company entered into a short-term lease for office space with a commencement date of March 2019 . Total gross commitments over the 12 -month term were $ 0.2 million. In February 2020, the Company extended the lease for an additional three months for a total of $ 42.0 thousand in additional commitments. The lease was terminated in May 2020 . Short-term lease expense for the three and nine months ended September 30, 2020 was nil and $ 0.1 million, respectively. Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of the remaining minimum lease payments over the lease term, with certain adjustments. As the leases do not provide an implicit rate, the Company uses a collateralized incremental borrowing rate based on the information available at the commencement date to determine the lease liability. As of September 30, 2021, the weighted-average remaining lease term for operating leases was 4.2 years and the weighted-average discount rate was 7.0 %. Cash paid for amounts included in the measurement of lease liabilities was $ 0.1 million and $ 0.3 million for the three and nine months ended September 30, 2021, respectively. The Company recognizes monthly operating lease expense on a straight-line basis over the term of the lease. Variable lease expense relates primarily to office lease common area maintenance, insurance, and property taxes, is expensed as incurred, and is excluded from the calculation of the lease liability and right-of-use-asset. 7. Term Loan In September 2019, the Company entered into a Loan and Security Agreement (the Loan Agreement) with Silicon Valley Bank (SVB) providing for a term loan (the Term Loan). In April 2020, the Company and SVB entered into an agreement (the Deferral Agreement) whereby the parties agreed to extend the interest-only period (the Interest-Only-Period), repayment dates of all monthly payments of principal due and the maturity date with respect to the Term Loan by six months . All other terms under the Loan Agreement remained unchanged. The Deferral Agreement was determined to be a debt modification, resulting in a prospective yield adjustment based on the revised terms. In connection with the Loan Agreement, the Company issued a warrant to purchase up to an aggregate of 49,609 shares of common stock at $ 1.44 per share. The Company determined the initial fair value of the warrant to be $ 0.1 million using the Black-Scholes option-pricing model. The fair value of the warrant was recorded to equity and as a debt discount, which was being amortized to interest expense using the effective interest method over the term of the Term Loan. In November 2020, the warrant was net-exercised for 46,358 shares of common stock. In March 2021, the Company entered into a First Amendment to Loan and Security Agreement (the First Amendment), pursuant to which the Company and SVB amended the Loan Agreement. The First Amendment increased the aggregate principal amount of the Term Loan commitment by SVB to up to $ 30.0 million. Up to $ 20.0 million is available under the first tranche of the Term Loan (First Tranche), $ 5.0 million of which was advanced immediately to repay the outstanding obligations under the Term Loan prior to the First Amendment with the remainder of the First Tranche commitment available through December 31, 2021 , and up to $ 10.0 million is available under the second tranche (Second Tranche), subject to the completion of certain clinical and financial milestones, which Second Tranche commitment is available through December 31, 2022 . Pursuant to the First Amendment, the Term Loan will mature on January 1, 2026 . The First Amendment was determined to be a debt modification. Pursuant to the First Amendment, the Company is required to make monthly payments of interest only commencing on the first day of the month following the funding date of each respective tranche and continuing thereafter through December 31, 2022 to the extent that the Company does not borrow any part of the Second Tranche or December 31, 2023 if the Company has borrowed some or all of the Second Tranche. Outstanding principal balances under the Term Loan, as amended by the First Amendment, bear interest at a floating per annum rate equal to (A) if the Company does not borrow under the Second Tranche, the greater of (x) 1 % above the prime rate or (y) 4.25 %; or (B) if the Company does borrow under the Second Tranche, the greater of (x) 3 % above the prime rate or (y) 6.25 %. 10 Table of Contents Following the interest-only period, the outstanding Term Loan balance will be payable in (i) 37 consecutive monthly payments (or 25 if the Company borrows under the Second Tranche) after the end of the Interest-Only Period and continuing on the same day of each month thereafter, in amounts that would fully amortize such Term Loan balance, as of the first business day of the first month following the Interest-Only Period, over the repayment period, plus (ii) monthly payments of accrued but unpaid interest. The final payment due on the maturity date shall include all outstanding principal and all accrued unpaid interest and an end of term payment totaling (x) 6 % of the original funded principal amount of the First Tranche if the Company does not borrow under the Second Tranche, or (y) 9.5 % of the total original funded principal amount under the First and Second Tranche if the Company does borrow under the Second Tranche (the End of Term Payment). The Company may prepay amounts outstanding under the Term Loan at any time provided certain notification conditions are met, in which case, all outstanding principal plus accrued and unpaid interest, the End of Term Payment, a prepayment fee between 1 % and 3 % of the commitment amount of the First and Second Tranches, and any bank expenses become due and payable. The Company incurred $ 10.0 thousand of debt issuance costs in connection with the First Amendment and had unamortized issuance costs and unamortized debt discount under the Loan Agreement of $ 2.0 thousand and $ 16.0 thousand, respectively. The Company recorded these costs, including the unaccreted portion of the final payment obligation under the Loan Agreement as a discount from the carrying value of the Term Loan, which are being amortized using the effective interest method over the life of the First Amendment. The unamortized debt issuance costs and debt discount balance was $ 0.1 million as of September 30, 2021. The Term Loan and unamortized discount and debt issuance costs balances as of September 30, 2021 are shown below (in thousands): September 30, 2021 Total Term Loan debt $ 5,000 Less: unamortized discount and debt issuance costs ( 133 ) Total Term Loan, net 4,867 Less: Term Loan, current portion — Term loan, net of current portion $ 4,867 The Company is subject to customary affirmative and restrictive covenants under the Loan Agreement, as amended. The Company’s obligations under the Loan Agreement, as amended, are secured by a first priority security interest in substantially all of its current and future assets, other than intellectual property. The Company also agreed not to encumber its intellectual property assets, except as permitted by the Loan Agreement, as amended. The Loan Agreement, as amended, also contains customary indemnification obligations and customary events of default, including, among other things, the Company’s failure to fulfill certain obligations under the Loan Agreement, as amended, and the occurrence of a material adverse change in its business, operations, or condition (financial or otherwise), a material impairment of the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of lender’s lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan Agreement, as amended, the lender would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement, as amended. As of September 30, 2021, management believes that the Company was in compliance with all financial covenants under the Loan Agreement, as amended, and there had been no material adverse change. The Company made interest payments on the Term Loan of $ 54.0 thousand and $ 0.2 million during the three and nine months ended September 30, 2021, respectively. The Company made interest payments on the Term Loan of $ 49.0 thousand and $ 0.1 million during the three and nine months ended September 30, 2020, respectively. 8. Commitments and Contingencies From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of business. The Company evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party and records a loss contingency on an undiscounted basis when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective and based on the status of such legal proceedings, the merits of the Company’s defenses, and consultation with legal counsel. Actual outcomes of these legal proceedings may differ materially from the Company’s estimates. 11 Table of Contents License Agreement In May 2016, the Company entered into a license agreement (the License Agreement), with Eli Lilly and Company (Lilly). Pursuant to the terms of the License Agreement, Lilly granted the Company an exclusive, worldwide, royalty bearing, sublicensable license under certain technology, patent rights, know-how and proprietary materials related to certain compounds, to research, develop, and commercialize such compounds for all pharmaceutical uses. The Company is also required to pay Lilly up to an aggregate of $ 23.0 million upon the achievement, during the time the License Agreement remains in effect, of certain milestones relating to the clinical development and commercial sales of products licensed under the License Agreement. Such payments are for predetermined fixed amounts, are paid only upon the first occurrence of each event and are due shortly after achieving the applicable milestone. In addition, the Company is required to pay Lilly tiered royalties on annual worldwide net sales with rates ranging from mid-single digits to sub-teens. No additional amounts were paid by the Company to Lilly during any of the periods presented, nor were due as of such dates pursuant to the License Agreement. 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. The Company was no t subject to any material legal proceedings during the nine months ended September 30, 2021. 9. Capital Structure Common Stock As of September 30, 2021 and December 31, 2020, the Company was authorized to issue 200,000,000 shares of common stock $ 0.0001 par value per share. Holders of the Company’s common stock are entitled to dividends if and when declared by the Board of Directors of the Company (Board of Directors). The holder of each share of common stock is entitled to one vote . As of September 30, 2021, no dividends were declared. Shares reserved for future issuance Common stock reserved for future issuance, on an as converted basis, consisted of the following: September 30, 2021 December 31, 2020 Stock options, issued and outstanding 2,534,530 2,278,771 Stock options, available for future issuance 3,315,255 2,637,076 Employee stock purchase plan, available for future issuance 443,116 220,640 Total shares reserved 6,292,901 5,136,487 Redeemable Convertible Preferred Stock Immediately prior to the closing of the IPO, all outstanding shares of the Company’s redeemable convertible preferred stock converted into 15,492,019 shares of common stock and the related carrying value was reclassified to common stock and additional paid-in capital. There was no redeemable convertible preferred stock issued or outstanding as of September 30, 2021 and December 31, 2020. 10. Equity Incentive Plans and Stock-Based Compensation Expense Equity Incentive Plans In October 2020, the Company adopted the 2020 Equity Incentive Plan (the 2020 Plan), which is a successor to and continuation of the 12 Table of Contents Company’s Amended and Restated 2016 Equity Incentive Plan (the 2016 Plan) . Total shares reserved under the 2020 Plan was 2,647,684 , inclusive of the shares that remained available for issuance under the 2016 Plan at the time the 2020 Plan became e ffective . Following the effectiveness of the 2020 Plan, no further grants will be made under the 2016 Plan ; however, shares subject to awards granted under the 2016 Plan continue to be governed by the 2016 Plan. Any shares subject to outstanding stock options or other stock awards that were granted under the 2016 Plan that terminate or expire prior to exercise or settlement; are settled in cash; are forfeited or repurchased because of the failure to vest; or are reacquired or withheld to satisfy a tax withholding obligation or the purchase or exercise price in accordance with the terms of the 2016 Plan will also be reserved for issuance under the 2020 Plan. Under the 2020 Plan and the 2016 Plan, individuals can be granted the ability to early exercise their options. There were no shares, related to the early exercise of options, subject to repurchase by the Company as of September 30, 2021. A summary of the Company’s stock option activity and related information is as follows (in thousands, except share and per share amounts): Outstanding Stock Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Balance as of December 31, 2020 2,278,771 $ 2.78 8.6 $ 49,059 Granted 539,420 17.34 — — Exercised ( 109,361 ) 1.46 — — Forfeited ( 174,300 ) 8.75 — — Balance as of September 30, 2021 2,534,530 $ 5.53 8.0 $ 7,143 Vested and expected to vest as of September 30, 2021 2,506,069 $ 5.53 8.0 $ 7,143 Vested and exercisable as of September 30, 2021 962,924 $ 3.11 6.4 $ 3,646 Stock options vested and expected to vest differs from total stock options outstanding as it excludes performance-based stock options for which the performance criteria has not been achieved and achievement is not expected as of September 30, 2021. The aggregate intrinsic values of options outstanding and exercisable were calculated as the difference between the exercise price of the options and the estimated fair value of the Company’s common stock as of the respective balance sheet date. The total intrinsic value of options exercised were $ 0.1 million and $ 1.7 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2021, a total of 3,810,703 shares were authorized for issuance under the 2020 Plan and 3,315,255 shares remained available for issuance, and a total of 2,039,082 shares were authorized for issuance under the 2016 Plan and no shares remained available for issuance. For the three and nine months ended September 30, 2021, the weighted-average fair value of options granted was $ 7.20 per share and $ 14.10 per share, respectively. 13 Table of Contents Stock-Based Compensation Expense The following table summarizes the components of stock-based compensation expense recognized in the Company’s statements of operations and comprehensive loss during the three and nine months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Research and development $ 254 $ 89 $ 864 $ 138 General and administrative 777 129 2,297 208 Total stock-based compensation expense $ 1,031 $ 218 $ 3,161 $ 346 During 2020, the Company granted options to purchase 127,042 shares of common stock to certain executive officers with performance criteria stipulating that no shares will vest unless certain financing and other related milestones are achieved. In January 2021, the Board of Directors determined that the performance-based vesting criteria of such options had been satisfied, which was deemed a modification. The fair value of the modified awards was $ 2.4 million, which will be recognized over the requisite service period. For the three and nine months ended September 30, 2021, the Company recorded stock-based compensation of $ 0.2 million and $ 0.8 million in connection with the modification, respectively. Unrecognized stock-based compensation expense as of September 30, 2021 was approximately $ 10.3 million, which is expected to be recognized over a weighted-average vesting term of 2.7 years. Employee Stock Purchase Plan The Board of Directors adopted and the Company’s stockholders approved the 2020 Employee Stock Purchase Plan (the ESPP) in October 2020. The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions of up to 15 % of their eligible compensation. At the end of each purchase period, employees are able to purchase shares at 85 % of the lower of the fair market value of the Company’s common stock as of the offering date or the applicable purchase date. A total of 220,640 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, the number of shares of common stock available for issuance under the ESPP will be automatically increased on the first day of each calendar year during the first ten-years of the term of the ESPP, beginning with January 1, 2021 and ending with January 1, 2030, by an amount equal to the lessor of (i) 1 % of the outstanding number of shares of the Company’s common stock on December 31st of the preceding calendar year, (ii) 441,280 shares of common stock or (iii) such lesser amount as determined by the Board of Directors . During the nine months ended September 30, 2021, 10,127 shares were issued under the ESPP. As of September 30, 2021, 443,116 shares of common stock remained available for issuance under the ESPP. 11. Income Taxes The Company accounts for income taxes under ASC Topic 740, Income Taxes. Under this standard, deferred tax assets and liabilities are recognized for future tax benefits or consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for significant deferred tax assets when it is more likely than not that such assets will not be realized through future operations. No provision for income taxes has been recorded due to losses incurred to date. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for deferred tax assets. 14 Table of Contents 12. Net Loss Per Share The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except share and per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Numerator: Net loss $ ( 11,447 ) $ ( 9,587 ) $ ( 33,108 ) $ ( 21,201 ) Denominator: Weighted-average shares of common stock outstanding 23,367,140 776,159 23,330,399 769,766 Net loss per share, basic and diluted $ ( 0.49 ) $ ( 12.35 ) $ ( 1.42 ) $ ( 27.54 ) Basic net loss per share was the same as diluted net loss per share for all periods as the inclusion of potentially dilutive securities would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations were as follows: September 30, 2021 2020 Series A redeemable convertible preferred stock (on an if-converted basis) — 4,280,690 Series B redeemable convertible preferred stock (on an if-converted basis) — 11,211,329 Shares subject to outstanding common stock options 2,534,530 2,402,539 Estimated shares issuable under the ESPP 28,595 — Shares subject to common stock warrants — 49,609 Total 2,563,125 17,944,167 13. Subsequent Events On November 15, 2021 (the Separation Date), Richard King retired and resigned from his positions as the Company’s Chief Executive Officer and member of the Board, effective immediately. In connection with Mr. King’s departure, the Company and Mr. King have entered into a separation and release agreement effective as of November 15, 2021 (the Separation Agreement). Pursuant to the Separation Agreement, in exchange for granting and not revoking a customary release of claims, Mr. King will be entitled to receive an amount equal to 12 months of his base salary ($ 500,000 per year) payable in a single lump sum payment on January 1, 2022, and continued coverage under COBRA equal to 12 months (consistent with what Mr. King was entitled to for a “Regular Termination” pursuant to the Spruce Biosciences, Inc. Severance and Change in Control Plan, dated September 9, 2020, and the signed Participation Agreement between the Company and Mr. King in connection therewith). In addition, the Separation Agreement provides that all vested options held by Mr. King as of the Separation Date may be exercised through June 30, 2023 . The Separation Agreement also contains a reaffirmation of Mr. King’s confidentiality obligations to the Company. 15 Table of Contents