SPRUCE BIOSCIENCES, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed financial statements and related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and notes thereto and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission, or SEC, on March 22, 2021, or the Annual Report. Unless otherwise indicated, all references in this Quarterly Report on Form 10-Q to “Spruce,” the “company,” “we,” “our,” “us” or similar terms refer to Spruce Biosciences, Inc. Forward-Looking Statements In addition to historical financial information, this discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section titled “Risk Factors” under Part II, Item 1A below. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “predict,” “should,” “will” or the negative of these terms or other similar expressions. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements . Overview We are a late-stage biopharmaceutical company focused on developing and commercializing novel therapies for rare endocrine disorders with significant unmet medical need. We are initially developing our wholly-owned product candidate, tildacerfont, as the potential first non-steroidal therapy to offer markedly improved disease control and reduce steroid burden for patients suffering from classic congenital adrenal hyperplasia, or CAH. Classic CAH is a serious and life-threatening disease with no known novel therapies approved in approximately 50 years. In a 12-week Phase 2a proof-of-concept clinical trial, tildacerfont-treated adult patients suffering from classic CAH who had poor disease control despite being on standard of care therapy achieved approximately 80% reductions in hormones that are key indicators of poor disease control. Furthermore, we are developing tildacerfont for females suffering from polycystic ovary syndrome, or PCOS, with primary adrenal androgen excess. Over 200 subjects across eight clinical trials to date have been administered tildacerfont with no drug-related serious adverse events, or SAEs, reported. We have initiated CAHmelia-203, a placebo-controlled, double-blind Phase 2b clinical trial in adult patients with classic CAH with poor disease control and anticipate topline results in 2023. We have also initiated CAHmelia-204, a second Phase 2b clinical trial in adult patients with classic CAH with good disease control focused on glucocorticoid reduction. We will provide guidance for topline results for CAHmelia-204 following the completion of a full assessment of the COVID-19 pandemic’s impact on projected enrollment. Based on post-hoc analyses of our clinical data to date, we have chosen to target two distinct groups of classic CAH patients with either good disease control or poor disease control. These two groups, which together make up the entire classic CAH patient population, have differing disease challenges centered on excessive adrenal androgen levels or excessive glucocorticoid usage, both of which have the potential to be addressed by treatment with tildacerfont, if approved. We believe our strategy to study CAH patients in these two enriched sub-populations may enable us to observe clinically meaningful outcomes. Additionally, we believe these two clinical trials will provide sufficient patient exposures for our registrational safety database. Assuming positive results, we plan to meet with the U.S. Food and Drug Administration, or FDA, and comparable foreign regulatory authorities to discuss registration. We also plan to investigate tildacerfont for the treatment of classic CAH in children as young as two years of age and plan to initiate the clinical development program for tildacerfont in the pediatric classic CAH population. We have received feedback from the FDA and European Medicines Agency, or EMA, on our planned Phase 2 clinical trial of tildacerfont in children with classic CAH. We have also submitted a pediatric investigational plan, or PIP, to the Pediatric Committee of the EMA regarding a registrational program in children with classic CAH. 16 Table of Contents PCOS is a hormonal disorder common among females of reproductive age affecting nearly five million females in the United States and approximately 115 million females worldwide. PCOS is characterized by elevated levels of androgens, cysts in the ovaries, and irregular periods. We have identified a subpopulation of patients where elevated levels of adrenal androgens are the cause of disease. We believe that tildacerfont may present a novel mechanism to reduce ACTH and provide a therapeutic option for females with PCOS. We have file d an investigational new drug application, or IND, to study tildacerfont in this patient population. By leveraging our existing Phase 1 program, which includes safety, tolerability, and pharmacokinetics of tildacerfont, we plan to initiate a Phase 2 proof-of-concept clinical trial. Beyond classic CAH and PCOS, we believe tildacerfont has potential utility in a range of diseases where the underlying biology supports a need to reduce excess secretion of or hyperresponsiveness to adrenocorticotropic hormone, or ACTH. We are committed to leveraging our deep scientific knowledge of the biology of rare endocrine disorders, the benefits of tildacerfont, and our commercial expertise to dramatically transform the lives of individuals living with these devastating disorders . Since our inception in November 2014, we have focused primarily on raising capital, establishing and protecting our intellectual property portfolio, organizing and staffing our company, business planning, and conducting preclinical and clinical development of, and manufacturing development for, our product candidate, tildacerfont. We have no products approved for commercial sale and have not generated any revenue to date, and we continue to incur significant research and development and other expenses related to our ongoing operations. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful development of tildacerfont and any future product candidates. We intend to build a highly specialized commercial organization to support the commercialization of tildacerfont, if approved, in the United States and Europe. Given a relatively small number of endocrinologists and specialists treat a large proportion of patients with classic CAH, we believe this market can be effectively addressed with a modest-sized targeted commercial sales force, alongside various high-touch patient initiatives. If tildacerfont is approved for additional indications, we plan to leverage our rare disorder commercial infrastructure and expertise to efficiently address those patient populations. We may also either build a commercial infrastructure or opportunistically seek strategic collaborations to benefit from the resources of biopharmaceutical companies specialized in either relevant disease areas or geographies. We rely, and expect to continue to rely, on third parties for the manufacture of tildacerfont for preclinical studies and clinical trials, as well as for commercial manufacture if tildacerfont obtains marketing approval. We also rely, and expect to continue to rely, on third parties to package, label, store, and distribute tildacerfont, if marketing approval is obtained. We believe that this strategy allows us to maintain a more efficient infrastructure by eliminating the need for us to invest in our own manufacturing facilities, equipment, and personnel while also enabling us to focus our expertise and resources on the development of tildacerfont. Since inception, we have incurred significant losses and negative cash flows from operations. During the nine months ended September 30, 2021, we incurred a net loss of $33.1 million and used $26.1 million of cash in operations. As of September 30, 2021, we had an accumulated deficit of $93.9 million, and we do not expect positive cash flows from operations for the foreseeable future. We expect to continue to incur significant and increasing losses for the foreseeable future, and our net losses may fluctuate significantly from period to period, depending on the timing of expenditures on our planned research and development activities. In October 2020, we consummated our initial public offering, or IPO, and issued 6,900,000 shares of common stock for net proceeds of $93.4 million, after deducting underwriting discounts, commissions and offering expenses. Since inception through September 30, 2021, we have raised aggregate gross proceeds of $224.5 million, including $103.5 million from our IPO in October 2020, $116.0 million from the sale of our redeemable convertible preferred stock and $5.0 million from the issuance of debt. As of September 30, 2021, we had cash, cash equivalents and investments of $131.3 million. We believe, based on our current operating plan, that our cash, cash equivalents and investments as of September 30, 2021 will be sufficient to fund our operations for at least the next 12 months. We have based this projection on assumptions that may be inaccurate and as a result, we may utilize our capital resources sooner than we expect. We expect our expenses will increase significantly in connection with our ongoing activities, as we: ▪ advance tildacerfont through our ongoing Phase 2b clinical trials in adult patients with classic CAH; ▪ advance clinical development of tildacerfont in additional indications, including pediatric classic CAH and a subpopulation of females with PCOS; ▪ pursue regulatory approvals of tildacerfont in patients with classic CAH and a subpopulation of females with PCOS; ▪ build a highly specialized commercial organization to support the commercialization of tildacerfont, if approved, in the United States and Europe; ▪ build a commercial infrastructure or opportunistically seek strategic collaborations to benefit from the resources of biopharmaceutical companies specialized in either relevant disease areas or geographies, if tildacerfont is approved for additional indications; 17 Table of Contents ▪ identify additional indications and formulations for which to investigate tildacerfont in the future and expand our pipeline of product candidates; ▪ implement operational, financial, and management information systems; ▪ hire additional personnel; ▪ operate as a public company; and ▪ obtain, maintain, expand, and protect our intellectual property portfolio. Our 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 our 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. Further, we are aware of delays in site activations for our CAHmelia-203 and -204 trials due to COVID-19 related closures and delays. At this time, the extent to which the COVID-19 pandemic impacts our business will depend on future developments, which are highly uncertain and cannot be predicted. License Agreement with Eli Lilly and Company In May 2016, we entered into a license agreement, or the License Agreement, with Eli Lilly and Company, or Lilly. Pursuant to the terms of the License Agreement, Lilly granted us an exclusive, worldwide, royalty bearing, sublicensable license under certain technology, patent rights, know-how, and proprietary materials, which we refer to collectively as the Lilly IP, and such patents, the Lilly Licensed Patents, relating to the CRF1 receptor antagonist compounds either listed in the License Agreement or covered by patent rights controlled by Lilly, which we refer to collectively as the Lilly Compounds, to research, develop, commercialize, make, have made, use, sell, offer to sell, and import the Lilly Compounds and any products containing a Lilly Compound, including any products containing a Lilly Compound and one or more additional active pharmaceutical ingredients, or APIs, other than a Lilly Compound, which we refer to collectively as the Lilly Licensed Products, for all pharmaceutical uses, including all diagnostic, therapeutic, and prophylactic uses, for human or animal administration. Lilly retained rights under the Lilly IP and the Lilly Licensed Patents for internal research purposes. As partial consideration for the rights granted to us under the License Agreement, we made a one-time upfront payment to Lilly of $0.8 million. We are 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 the Lilly Licensed Products. Such payments are for predetermined fixed amounts, are paid only upon the first occurrence of each such event, and are due shortly after achieving the applicable milestone. In addition, we are required to pay Lilly tiered royalties on annual worldwide net sales of Lilly Licensed Products, with rates ranging from mid-single-digits to sub-teens, or the Lilly Royalties. The Lilly Royalties shall commence on a country-by-country basis on the date of the first commercial sale of Lilly Licensed Product in such country, and shall expire on a country-by-country basis on the latest of the following dates: (i) the tenth anniversary of the date of first commercial sale in such country, (ii) the expiration in such country of the last-to-expire Lilly Licensed Patent having a valid claim covering the manufacture, use, or sale of the Lilly Licensed Product as commercialized in such country, and (iii) the expiration of any data or regulatory exclusivity period for the Lilly Licensed Product in such country. Upon such expiration, the license granted to us with respect to such country shall become fully paid-up, royalty-free, perpetual and irrevocable. In addition, the Lilly Royalties may be reduced upon the occurrence of certain events. Components of Results of Operations Operating Expenses We classify operating expenses into two main categories: (i) research and development expenses and (ii) general and administrative expenses. Research and Development Expenses Our research and development expenses consist of external and internal expenses incurred in connection with our research activities and development programs. 18 Table of Contents These expenses include: ▪ external expenses, consisting of: o clinical development—expenses associated with clinical research organizations, or CROs, engaged to manage and conduct clinical trials; o preclinical studies—expenses associated with preclinical studies performed by vendors; o manufacturing—expenses associated with contract manufacturing; labeling, packaging, and distribution of clinical trial supplies; and consulting; o other research and development—expenses associated with quality and regulatory compliance; and ▪ internal expenses, consisting of personnel, including expenses for salaries, bonuses, benefits, stock-based compensation, as well as allocation of certain expenses. To date, these expenses have been incurred to advance tildacerfont. These expenses will primarily consist of expenses for the conduct of clinical trials as well as manufacturing costs for clinical drug supply. We expect that significant additional spending will be required to progress tildacerfont through clinical development and regulatory approval. Research and development expenses are recognized as they are incurred. If deposits are required by external vendors, a portion of the deposit is included as a prepaid expense until sufficient progress has occurred to amortize the deposit to expense in the statements of operations and comprehensive loss. General and Administrative Expenses General and administrative expenses consist primarily of personnel-related costs, including salaries, bonuses, benefits, and stock-based compensation expense, for personnel in executive, finance, and other administrative functions. General and administrative expenses also include legal fees, professional fees, insurance costs, facility costs not otherwise included in research and development expenses, and public company expenses such as costs associated with compliance with the rules and regulations of the SEC, and those of the Nasdaq Stock Market, Inc., or Nasdaq, listing rules. We expect that our general and administrative expenses will continue to increase in the foreseeable future as additional administrative personnel and services are required to manage these functions of a public company, as we advance tildacerfont through clinical development and regulatory approval. Interest Expense Interest expense consists of interest incurred and non-cash amortization of debt discount and issuance costs in connection with the term loan, or Term Loan, provided pursuant to the Loan and Security Agreement entered into with Silicon Valley Bank in September 2019, or the Loan Agreement, as amended by a First Amendment to Loan and Security Agreement entered into with Silicon Valley Bank in March 2021, or the First Amendment. Other Income, Net Other income, net primarily consists of interest income earned on our cash and cash equivalents. 19 Table of Contents Results of Operations Comparisons of the Three Months Ended September 30, 2021 and 2020 The following table summarizes our results of operations for the periods presented (in thousands): Three Months Ended September 30, 2021 2020 Change Operating expenses: Research and development $ 8,607 $ 7,769 $ 838 General and administrative 2,793 1,790 1,003 Total operating expenses 11,400 9,559 1,841 Loss from operations (11,400 ) (9,559 ) (1,841 ) Interest expense (88 ) (79 ) (9 ) Other income, net 41 51 (10 ) Net loss $ (11,447 ) $ (9,587 ) $ (1,860 ) Research and Development Expenses Research and development expenses were $8.6 million for the three months ended September 30, 2021, compared to $7.8 million for the three months ended September 30, 2020. The overall increase in research and development expenses was primarily related to an increase in clinical and regulatory activities associated with progressing clinical development of tildacerfont. The following table sets forth the primary external and internal research and development expenses for the periods presented below (in thousands). Three Months Ended September 30, 2021 2020 Change External expenses: Clinical development $ 4,868 $ 4,445 $ 423 Manufacturing 1,430 1,406 24 Preclinical studies 513 624 (111 ) Other research and development 440 202 238 Internal expenses: Personnel 1,268 1,065 203 Allocated overhead 88 27 61 Total research and development expenses $ 8,607 $ 7,769 $ 838 General and Administrative Expenses General and administrative expenses were $2.8 million for the three months ended September 30, 2021, compared to $1.8 million for the three months ended September 30, 2020. The overall increase in general and administrative expenses was primarily related to an increase of $0.8 million in personnel-related expenses and $0.5 million in directors’ and officers’ liability insurance premiums associated with operating as a public company, offset by lower professional services fees of $0.3 million. Interest Expense Interest expense was $0.1 million for the three months ended September 30, 2021, compared to $0.1 million interest expense for the three months ended September 30, 2020. Interest expense incurred relates to the Term Loan with Silicon Valley Bank. 20 Table of Contents Comparisons of the Nine Months Ended September 30, 2021 and 2020 The following table summarizes our results of operations for the periods presented (in thousands): Nine Months Ended September 30, 2021 2020 Change Operating expenses: Research and development $ 24,440 $ 18,040 $ 6,400 General and administrative 8,491 3,041 5,450 Total operating expenses 32,931 21,081 11,850 Loss from operations (32,931 ) (21,081 ) (11,850 ) Interest expense (257 ) (245 ) (12 ) Other income, net 80 125 (45 ) Net loss $ (33,108 ) $ (21,201 ) $ (11,907 ) Research and Development Expenses Research and development expenses were $24.4 million for the nine months ended September 30, 2021, compared to $18.0 million for the nine months ended September 30, 2020. The overall increase in research and development expenses was primarily related to an increase in clinical and regulatory activities associated with progressing clinical development of tildacerfont. The following table sets forth the primary external and internal research and development expenses for the periods presented below (in thousands). Nine Months Ended September 30, 2021 2020 Change External expenses: Clinical development $ 13,311 $ 9,939 $ 3,372 Manufacturing 3,399 3,019 380 Non-clinical 1,942 1,259 683 Other research and development 1,047 449 598 Internal expenses: Personnel 4,484 3,283 1,201 Allocated overhead 257 91 166 Total research and development expenses $ 24,440 $ 18,040 $ 6,400 General and Administrative Expenses General and administrative expenses were $8.5 million for the nine months ended September 30, 2021, compared to $3.0 million for the nine months ended September 30, 2020. The overall increase in general and administrative expenses was primarily related to an increase of $3.2 million in personnel-related expenses, $1.5 million in directors’ and officers’ liability insurance premiums, and $0.5 million in legal and professional fees primarily related to operating as a public company. Interest Expense Interest expense was $0.3 million for the nine months ended September 30, 2021, compared to $0.2 million interest expense for the nine months ended September 30, 2020. Interest expense incurred relate to the Term Loan with Silicon Valley Bank. Liquidity and Capital Resources Liquidity Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from operations. We anticipate that we will continue to incur net losses for the foreseeable future. As of September 30, 2021, we had an accumulated deficit of $93.9 million. As of September 30, 2021, we had cash, cash equivalents and investments of $131.3 million. In October 2020, we consummated our IPO and issued 6,900,000 shares of common stock for net proceeds of approximately $93.4 million, after deducting underwriting discounts, commissions and offering expenses. We believe, 21 Table of Contents based on our current operating plan, that our cash , cash equivalents and investments as of September 30 , 2021 will be sufficient to fund our operations for at least the next 12 months. Contractual Obligations and Commitments During the three and nine months ended September 30, 2021 , there were no material changes to our contractual obligations and commitments from those described under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report. We enter into contracts in the normal course of business with third-party contract manufacturing organizations and CROs for clinical trials, non-clinical studies and testing, drug substance and product manufacturing and other services for operating purposes. These contracts are generally cancelable by us upon prior written notice after a certain period. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. We have also entered into the License Agreement under which we are obligated to make aggregate milestone payments upon the achievement of specified milestones as well as royalty payments. The payment obligations under the License Agreement are contingent upon future events, such as our achievement of specified milestones or generating product sales. As of September 30, 2021, we were unable to estimate the timing or likelihood of achieving these milestones or generating future product sales. See the section titled “License Agreement with Lilly and Company” above. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. Loan Agreement In September 2019, we entered into the Loan Agreement with Silicon Valley Bank providing for the Term Loan. Pursuant to the Loan Agreement, we requested $2.5 million from the first tranche in connection with the entry into the Loan Agreement and drew the second tranche of $2.0 million in December 2019. In April 2020, we and Silicon Valley Bank entered into the Deferral Agreement whereby we and Silicon Valley Bank agreed to extend the repayment dates of all monthly payments of principal due and the maturity date with respect to the Term Loan by six months. In March 2021, we entered into the First Amendment with Silicon Valley Bank. The First Amendment increased the aggregate principal amount of the Term Loan commitment by Silicon Valley Bank to up to $30.0 million. Up to $20.0 million is available under the first tranche of the Term Loan, or the 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 commitments available through December 31, 2021, and up to $10.0 million is available under the second tranche, or the 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. As of September 30, 2021, $5.0 million was outstanding under the Term Loan. The Loan Agreement, as amended by the Deferral Agreement and the First Amendment, provides for monthly cash interest-only payments 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%. 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 amendment 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 22 Table of Contents 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) . We 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 principal amount of the first and second tranches, and any bank expenses become due and payable. The Loan Agreement, as amended, contains certain covenants that limit our ability to engage in certain transactions that may be in our long-term best interest, including entering into a change in control transaction. The Loan Agreement, as amended, also contains certain covenants that limit our ability to obtain additional debt financing, including incurring debt from third parties not permitted under the Loan Agreement, as amended, or incurring liens or encumbrances on our property. While we have not previously breached and are currently in compliance with the covenants contained in the Loan Agreement, as amended, we may breach these covenants in the future. Our ability to comply with these covenants may be affected by events and factors beyond our control. In the event that we breach one or more covenants, Silicon Valley Bank may choose to declare an event of default and require that we immediately repay all amounts outstanding under the Loan Agreement, terminate any commitment to extend further credit and foreclose on the collateral. In addition, if an event of default occurs under the Loan Agreement, as amended, Silicon Valley Bank may, among other things, accelerate the Term Loan or do any acts it considers necessary or reasonable to protect its security interest in the collateral under the Term Loan. Events of default include the occurrence of a material adverse change in our business, operations, or condition (financial or otherwise). The occurrence of any of these events could have a material adverse effect on our business, financial condition, and results of operations. In connection with the first and second tranches under the Loan Agreement prior to the First Amendment, we issued a warrant to purchase up to an aggregate of 49,609 shares of common stock at $1.44 per share. We 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 also as a debt discount, which is amortized to interest expense using the effective interest method over the term of the Term Loan. The warrant was net-exercised for 46,358 shares of our common stock in November 2020. Funding Requirements To date, we have not generated any revenue. We do not expect to generate any meaningful revenue unless and until we obtain regulatory approval and commercialize tildacerfont or any future product candidates, and we do not know when, or if at all, that will occur. We will continue to require additional capital to develop tildacerfont and fund operations for the foreseeable future. Our primary uses of cash are to fund our operations, which consist primarily of research and development expenses related to our clinical development programs, and to a lesser extent, general and administrative expenses. At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, tildacerfont or any of our future product candidates. We expect our research and development expenses to increase significantly in the foreseeable future as we continue to invest in research and development activities related to developing tildacerfont, as tildacerfont continues advancing in late stage studies for the treatment of classic CAH in adult patients, as we conduct clinical trials of tildacerfont in additional indications beyond classic CAH in adult patients, as we seek regulatory approvals for tildacerfont, and incur expenses associated with hiring additional personnel to support our research and development efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, the successful development of tildacerfont is highly uncertain, and we may never succeed in achieving regulatory approval for tildacerfont in classic CAH in adult patients or other indications. In addition, we expect to incur additional costs associated with operating as a public company. We may seek to raise capital through equity or debt financings, collaborative agreements or other arrangements with other companies, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will depend on many factors, including: ▪ the progress, costs, trial design, results of, and timing of our ongoing and planned clinical trials of tildacerfont; ▪ the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals; ▪ the number and characteristics of product candidates that we may pursue; ▪ our ability to manufacture sufficient quantities of tildacerfont; 23 Table of Contents ▪ our plan to expand our research and development activities; ▪ the costs associated with manufacturing tildacerfont and establishing commercial supplies and sales, marketing, and distribution capabilities; ▪ the costs associated with securing and establishing commercialization; ▪ the costs of acquiring, licensing, or investing in product candidates; ▪ our ability to maintain, expand, and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense, and enforcement of any patents or other intellectual property rights; ▪ our need and ability to retain key management and hire scientific, technical, business, and medical personnel; ▪ the effect of competing products and product candidates and other market developments; ▪ the timing, receipt, and amount of sales from tildacerfont and any future product candidates, if approved; ▪ our need to implement additional internal systems and infrastructure, including financial and reporting systems; ▪ the economic and other terms, timing of, and success of any collaboration, licensing, or other arrangements which we may enter in the future; and ▪ the effects of the disruptions to and volatility in the credit and financial markets in the United States and worldwide from the COVID-19 pandemic. If we raise additional funds by issuing equity securities, our stockholders will experience dilution. If we raise additional capital through debt financing, we may be subject to covenants that restrict our operations including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments, and engage in certain merger, consolidation, or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all. Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the COVID-19 pandemic and actions taken to slow its spread, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. If the equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back, or discontinue the development or commercialization of tildacerfont or other research and development initiatives. We also could be required to seek collaborators for tildacerfont and any future product candidates at an earlier stage than otherwise would be desirable or on terms that are less favorable than might otherwise be available or relinquish or license on unfavorable terms our rights to tildacerfont and any future product candidates in markets where we otherwise would seek to pursue development or commercialization ourselves. Summary Statement of Cash Flows The following table sets forth the primary sources and uses of cash, cash equivalents, and restricted cash for the periods presented below (in thousands): Nine Months Ended September 30, 2021 2020 Net cash used in operating activities $ (26,078 ) $ (18,253 ) Net cash used in investing activities (73,185 ) (50 ) Net cash provided by financing activities 476 86,753 Net increase/(decrease) in cash, cash equivalents, and restricted cash $ (98,787 ) $ 68,450 24 Table of Contents Cash Used in Operating Activities For the nine months ended September 30, 2021, net cash used in operating activities was $26.1 million, which consisted of a net loss of $33.1 million, partially offset by a net change of $3.5 million in our net operating assets and liabilities and by $3.5 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to a decrease in prepaid expenses and other current assets of $1.7 million, offset by a decrease in accounts payable and accrued expenses of $1.8 million, and an increase in accrued compensation and noncurrent assets and liabilities of $0.1 million. The non-cash charges of $3.5 million consisted of stock-based compensation expense, non-cash lease expense and depreciation and amortization expense. For the nine months ended September 30, 2020, net cash used in operating activities was $18.3 million, which consisted of a net loss of $21.2 million, partially offset by a net change of $2.5 million in our net operating assets and liabilities and by $0.4 million in non-cash charges. The net change in our operating assets and liabilities was primarily due to a net increase in accounts payable and accrued expenses of $3.7 million, partially offset by a net increase in prepaid expenses and other current assets of $0.9 million and a $0.3 million net decrease in accrued compensation and noncurrent assets and liabilities. The non-cash charges of $0.4 million consisted of stock-based compensation expense, non-cash lease expense and depreciation and amortization expense. Cash Used in Investing Activities For the nine months ended September 30, 2021, cash used in investing activities was $73.2 million, consisting of available for sale securities purchases of $73.1 million and $0.1 million related to the purchase of property and equipment. For the nine months ended September 30, 2020, cash used in investing activities was $50.0 thousand and related to the purchase of property and equipment. Cash Provided by Financing Activities For the nine months ended September 30, 2021, cash provided by financing activities was $0.5 million, consisting primarily of net proceeds from the issuance of long-term debt and proceeds from exercise of stock options and employee stock purchase plan. For the nine months ended September 30, 2020, cash provided by financing activities was $86.8 million primarily from the issuance and sale of Series B redeemable convertible preferred stock. Critical Accounting Policies, Significant Judgments and Use of Estimates Our condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these condensed financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses, as well as the related disclosure of contingent assets and liabilities as of the date of the financial statements. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are described in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies, Significant Judgments and Use of Estimates” in the Annual Report and the notes to our condensed financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. During the nine months ended September 30, 2021, there were no material changes to our critical accounting policies from those discussed in the Annual Report. JOBS Act We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. The JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards, delaying the adoption of these accounting standards until they would apply to private companies. We have elected to use this extended transition period under the JOBS Act until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. 25 Table of Contents We could be an emerging growth company until December 31, 2025 , although circumstances could cause us to lose that status earlier, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act or if we have total annual gross revenue of $1.07 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately.