Tempest Therapeutics, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TEMPEST THERAPEUTICS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID 42 ) 77 Report of Independent Registered Public Accounting Firm (PCAOB ID 34 ) 79 Consolidated Balance Sheets 80 Consolidated Statements of Operations 81 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) 82 Consolidated Statements of Cash Flows 83 Notes to Consolidated Financial Statements 84 76 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Tempest Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of Tempest Therapeutics, Inc. (the Company) as of December 31, 2021, the related consolidated statements of operations , convertible preferred stock and stockholders' equity (deficit) and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles . Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit 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 audit 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 audit provides 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) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 77 Accrued research and development expenses Description of the Matter As described in Note 2 to the consolidated financial statements under the caption “Research and development expenses and accrued research and development”, the Company records the cost of research and development activities as they are incurred. The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. Service fees are accrued based on the Company’s estimates of the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers, the Company’s estimates of accrued expenses and on information available at each balance sheet date. As of December 31, 2021, the Company’s accrued clinical trial liability was $0.8 million. Auditing the Company’s accrual for research and development expenses was challenging because of the estimation involved in determining the accrual balance, which included information that was accumulated from multiple sources. In certain circumstances, the determination of the nature and level of services that have been received during the reporting period requires judgment because the timing and pattern of vendor invoicing did not correspond to the level of services provided and invoicing from clinical study sites and other vendors may not yet be available to management. How We Addressed the Matter in Our Audit To test the accrued research and development expenses, our audit procedures included, among others, testing the completeness and accuracy of the underlying data used in the estimate, including, but not limited to, estimated project duration, research and manufacturing services incurred to date and terms of contractual arrangements. To assess the reasonableness of the data, we corroborated the progress of the clinical trials with Company research and development personnel and obtained third-party evidence supporting the activities performed to date. We recalculated the accrual based on executed contracts with the clinical research organizations, contract manufacturing organizations, clinical study sites and collaboration partners. We also tested subsequent invoicing received from third parties to assess the impact to the accrual at the balance sheet date and compared that to the Company’s estimates. /s/ Ernst & Young LLP We have served as the Company's auditor since 2021. Grand Rapids, Michigan March 29, 2022 78 Report of Independent Registered Public Accounting Firm To the stockholders and the Board of Directors of Tempest Therapeutics Inc. Opinion on the Financial Statements We have audited the accompanying balance sheet of Tempest Therapeutics Inc. (the "Company") as of December 31, 2020, the related statement of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows, for the year 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 as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements as of and for the year ended December 31, 2020 have been prepared assuming that the Company will continue as a going concern. The Company had incurred losses since inception and had forecasted cash needs in excess of current liquidity as of December 31, 2020, which raised substantial doubt about its ability to continue as a going concern. The financial statements as of and for the year ended December 31, 2020 did not include any adjustments that might have resulted from the outcome of this uncertainty. 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 audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit 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 audit 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 audit provides a reasonable basis for our opinion. /s/ Deloitte & Touche LLP San Francisco, California May, 10, 2021 (March 29, 2022, as to the effects of the stock exchange as described in Note 1) We began serving as the Company's auditor in 2017. In 2021 we became the predecessor auditor. 79 Tempest Therapeutics, Inc. Consolidated Balance Sheets (in thousands except share and per share amounts) As of December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 51,829 $ 18,820 Insurance recovery of legal settlement 15,000 — Prepaid expenses and other current assets 2,134 1,005 Total current assets 68,963 19,825 Property and equipment — net 1,113 1,110 Operating lease right-of-use assets 3,051 1,877 Other noncurrent assets 111 51 Total assets $ 73,238 $ 22,863 Liabilities, convertible preferred stock and stockholders’ equity (deficit) Current liabilities: Accounts payable $ 991 $ 1,071 Accrued legal settlement 15,000 — Accrued expenses 1,589 665 Current operating lease liabilities 1,442 712 Accrued compensation 912 695 Interest payable 92 — Early option exercise liability — 79 Total current liabilities 20,026 3,222 Loan payable (net of discount and issuance costs of $ 756 ) 15,069 — Operating lease liabilities 2,026 1,727 Total liabilities 37,121 4,949 Commitments and contingencies (Note 7) Convertible preferred stock, $ 0.001 par value; shares 5,000,000 and 135,936,731 shares authorized at December 31, 2021 and 2020; nil and 114,686,731 shares issued and outstanding at December 31, 2021 and 2020, respectively; liquidation preference of $ 0 and $ 100,186,732 at December 31, 2021 and 2020, respectively — 86,707 Stockholders’ equity (deficit): Common stock, $ 0.001 par value; 100,000,000 shares and 196,000,000 shares authorized at December 31, 2021 and 2020; 6,910,324 and 527,265 shares issued and outstanding, nil and 28,996 subject to repurchase at December 31, 2021 and 2020, respectively 7 1 Additional paid-in capital 136,173 2,967 Accumulated deficit ( 100,063 ) ( 71,761 ) Total stockholders’ equity (deficit) 36,117 ( 68,793 ) Total liabilities, convertible preferred stock and stockholders’ equity (deficit) $ 73,238 $ 22,863 See accompanying Notes to Consolidated Financial Statements 80 Tempest Therapeutics, Inc. Consolidated Statements of Operations (in thousands except share and per share amounts) For the Years Ended December 31, 2021 2020 Operating expenses: Research and development $ 17,166 $ 14,389 General and administrative 9,820 4,909 Loss from operations ( 26,986 ) ( 19,298 ) Other (expenses) income, net: Interest expense ( 1,282 ) — Interest income and other (expense) income, net ( 34 ) 90 Total other (expenses) income, net ( 1,316 ) 90 Provision for income taxes — — Net loss $ ( 28,302 ) $ ( 19,208 ) Net loss per share of common stock, basic and diluted $ ( 7.47 ) $ ( 41.03 ) Weighted-average shares of common stock outstanding, basic and diluted 3,790,303 468,161 See accompanying Notes to Consolidated Financial Statements 81 Tempest Therapeutics, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) (in thousands except share amounts) Series A Convertible Preferred Stock Series B Convertible Preferred Stock Series B-1 Convertible Preferred Stock Common Stock Additional Paid-In Capital Deficit Accumulated Total Stockholders' Equity (Deficit) Shares Amount Shares Amount Shares Amount Shares Amount BALANCE — January 1, 2020 17,000,000 $ 16,982 25,186,738 $ 12,235 28,749,997 $ 22,755 410,429 $ 1 $ 2,188 $ ( 52,553 ) $ ( 50,364 ) Exercise of stock options — — — — — — 14,406 — 68 — 68 Issuance of preferred stock for cash—net of issuance costs of $ 265 — — — — 43,749,996 34,735 — — — — — Vesting of early exercised stock options and restricted stock — — — — — — 73,434 — 258 — 258 Share-based compensation — — — — — — — — 453 — 453 Net loss — — — — — — — — — ( 19,208 ) ( 19,208 ) BALANCE — December 31, 2020 17,000,000 $ 16,982 25,186,738 $ 12,235 72,499,993 $ 57,490 498,269 $ 1 $ 2,967 $ ( 71,761 ) $ ( 68,793 ) Exercise of stock options — — — — — — 33,127 — 139 — 139 Vesting of early exercised stock options — — — — — — 28,196 — 133 — 133 Conversion of preferred stock to common stock ( 17,000,000 ) ( 16,982 ) ( 25,186,738 ) ( 12,235 ) ( 72,499,993 ) ( 57,490 ) 3,692,912 4 86,703 — 86,707 Issuance of common stock for cash, net of issuance cost of $ 446 — — — — — — 1,388,374 1 33,473 — 33,474 Share-based compensation — — — — — — — — 1,105 — 1,105 Reverse recapitalization transaction costs — — — — — — — — ( 6,420 ) — ( 6,420 ) Issuance of common stock to Millendo shareholders — — — — — — 1,269,446 1 18,000 — 18,001 Issuance of common stock warrants 73 — 73 Net loss — — — — — — — — — ( 28,302 ) ( 28,302 ) BALANCE — December 31, 2021 — $ — — $ — — $ — 6,910,324 $ 7 $ 136,173 $ ( 100,063 ) $ 36,117 See accompanying Notes to Consolidated Financial Statements 82 Tempest Therapeutics, Inc. Consolidated Statements of Cash Flows (in thousands) For the Years Ended December 31, 2021 2020 Operating activities: Net loss $ ( 28,302 ) $ ( 19,208 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense 374 339 Stock-based compensation expense 1,105 453 Noncash lease expense 896 476 Noncash interest and other expense, net 583 ( 6 ) Changes in operating assets and liabilities: Prepaid expenses and other assets ( 179 ) ( 367 ) Accounts payable ( 209 ) ( 574 ) Accrued expenses and other liabilities 723 ( 205 ) Interest payable 92 — Operating lease liabilities ( 1,040 ) 75 Cash used in operating activities ( 25,957 ) ( 19,017 ) Investing activities: Purchase of property and equipment ( 135 ) ( 50 ) Repayment of related party note receivable 38 44 Cash used in investing activities ( 97 ) ( 6 ) Financing activities: Proceeds from issuance of series B-1 convertible preferred stock — 35,000 Payment of preferred stock issuance costs — ( 469 ) Proceeds from the issuance of common stock, net of equity issuance costs of $ 446 33,425 — Borrowings on loan payable 15,000 — Payment of loan issuance costs ( 95 ) — Cash acquired in connection with the reverse recapitalization 17,045 — Payment of reverse recapitalization transaction costs ( 6,420 ) — Proceeds from option exercises 108 69 Repurchase of unvested options — ( 1 ) Cash provided by financing activities 59,063 34,599 Net increase in cash and cash equivalents 33,009 15,576 Cash and cash equivalents at beginning of year 18,820 3,244 Cash and cash equivalents at end of year $ 51,829 $ 18,820 Supplemental disclosure of cash flow information: Cash paid for interest $ 953 $ — Non-cash investing activities: Property and equipment in accounts payable $ 78 $ — Non-cash financing activities: Vesting of early exercise stock options $ 136 $ 258 Debt issuance costs related to financing in accrued liabilities $ — $ 34 Issuance of common stock for license agreement $ 49 $ — See accompanying Notes to Consolidated Financial Statements 83 Tempest Therapeutics, Inc. Notes to Consolidated Financial Statements As of and For the Years Ended December 31, 2021 and 2020 (In Thousands Except Share and Per Share Amount) 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Description of Business Tempest Therapeutics, Inc. (“Tempest,” or the “Company”) is a clinical-stage oncology company advancing small molecules that combine both tumor-targeted and immune-mediated mechanisms with the potential to treat a wide range of tumors. The company’s two clinical programs are TPST-1120 and TPST-1495, antagonists of PPARα and EP2/EP4, respectively. Both TPST-1120 and TPST-1495 are advancing through Phase 1 clinical trials designed to study both agents as monotherapies and in combination with other approved agents. In collaboration with F. Hoffmann La Roche, TPST-1120 is also advancing through a randomized first line, global, Phase 1b/2 clinical study in combination with the standard-of-care regimen of atezolizumab and bevacizumab in patients with advanced or metastatic hepatocellular carcinoma. Tempest is also developing an orally-available inhibitor of TREX-1 designed to activate selectively the cGAS/STING pathway, an innate immune response pathway important for the development of anti-tumor immunity. Tempest is headquartered in South San Francisco. Merger with Millendo —On March 29, 2021, TempestTx, Inc. (“Private Tempest”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Millendo Therapeutics, Inc. (“Millendo”). Concurrent with the execution and delivery of the Merger Agreement, Private Tempest entered into funding agreements with certain investors named therein, pursuant to which the investors agreed to purchase, in the aggregate, $ 30.0 million of common stock of Private Tempest, convertible into securities of Millendo. On June 25, 2021, Private Tempest completed the merger with Millendo in accordance with the Merger Agreement. Prior to the effective time of the merger, Millendo effected a 1-for-15 reverse stock split, and right after the merger, Millendo changed its name to Tempest Therapeutics, Inc. Under the terms of the Merger Agreement, immediately prior to the effective time of the merger, each share of Private Tempest’s preferred stock was converted into a share of Private Tempest’s common stock. At closing of the merger, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock, resulting in approximately 6,635,345 shares of the Company’s common stock being issued and outstanding immediately following the effective time of the merger. The Company also assumed all of the outstanding and unexercised stock options and warrants to purchase shares of Private Tempest capital stock. The assumed options continue to be governed by the terms of the 2011 and 2017 Equity Incentive Plans (as discussed more in Note 12) under which the options were originally granted, with such options hence forth representing the right to purchase a number of shares of the Company’s common stock equal to 0.0322 multiplied by the number of shares of Private Tempest common stock previously represented by such options. The merger was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, Private Tempest was deemed to be the accounting acquirer for financial reporting purposes. This determination was primarily based on the expectation that, immediately following the merger: (i) Private Tempest stockholders would own a substantial majority of the voting rights; (ii) Private Tempest would designate a substantial majority of the initial members of the board of directors of the combined company; (iii) Private Tempest’s executive management team would become the management of the combined company; and (iv) the combined company would be named Tempest Therapeutics, Inc. Accordingly, for accounting purposes, the merger was treated as the equivalent of Tempest issuing stock to acquire the net assets of Millendo. As a result of the merger, the net assets of Millendo were recorded at their acquisition-date fair value in the financial statements of Private Tempest and the reported operating results prior to the merger will be those of Private Tempest. Historical per share figures of Private Tempest have been retroactively restated based on the exchange ratio of 0.0322 . Liquidity and Management Plans 84 The accompanying financial statements have been prepared assuming the Company will continue as a going concern. In the course of its development activities, t he Company had incurred losses since inception and had forecasted cash needs in excess of current liquidity as of December 31, 2020, which raised substantial doubt about its ability to continue as a going concern at that time. Management implemented a plan to remove this condition by raising additional capital. In January 2021, the Company entered into a loan agreement with a lender to borrow a term loan amount of $35.0 million of which $15.0 million was funded to the Company on January 15, 2021 (see Note 8). In addition, as a result of the merger with Millendo, the Company raised an additional $30.0 million. In July 2021, the Company also entered into a sales agreement (the “Sales Agreement”) with Jefferies LLC (the “Agent”), pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $100.0 million of its common stock through the Agent in a series of one or more ATM equity offerings . The additional capital will fund the Company’s ongoing working capital, investing, and financing requirements for at least the next 12 months. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation —The accompanying Consolidated Financial Statements have been prepared in accordance with US generally accepted accounting principles ("GAAP") and necessarily include amounts based on estimates and assumptions by management. Use of Estimates —The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to research and development accruals, recoverability of long-lived assets, right-of-use assets, lease obligations, stock-based compensation and income taxes uncertainties and valuation allowances. Management bases its estimates on historical experience and on various other assumptions that are believed 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 may differ from those estimates. Segment Information —The Company operates and manages its business as one reportable and operating segment, which is the business of discovery and development of small molecule drugs to treat cancers. All assets and operations are in the U.S. The Company’s Chief Executive Officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. Risks and Uncertainties —The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, protection of proprietary technology, dependence on key personnel, reliance on single-source vendors, availability of raw materials, patentability of the Company’s products and processes and clinical efficacy and safety of the Company’s products under development, compliance with government regulations and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical studies, clinical trials and regulatory approval, prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance and reporting. The Company’s product candidates are still in development and, to date, none of the Company’s product candidates have been approved for sale and, therefore, the Company has not generated any revenue from product sales. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained or maintained, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate revenue from product sales. The Company operates in an environment of rapid technological change and substantial competition from other pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees, consultants and other third parties. Moreover, the current COVID-19 pandemic, which is impacting worldwide economic activity, poses risk that the Company or its employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. The extent to which the COVID-19 pandemic will impact the Company’s business will depend on future developments that are highly uncertain and cannot be predicted at this time. Concentration of Credit Risk —Financial instruments, which potentially subject the Company to concentration of risk, consist principally of cash and money market fund. All of the Company’s cash and money market fund are deposited in accounts with a major financial institution, and amounts may exceed federally insured limits. Management believes that the Company is not 85 exposed to significant credit risk due to the financial strength of the depository institution in which the cash and money market fund are held. The Company has no off-balance sheet concentrations of credit risk, such as foreign currency exchange contracts, option contracts or other hedging arrangements. Cash and Cash Equivalents —The Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisitions to be cash equivalents. As of December 31, 2021 and 2020, the Company’s cash and cash equivalents consisted of bank deposits and money market funds. Leases —The Company determines if an arrangement is a lease at contract inception. A lease exists when a contract conveys to the customer the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. The definition of a lease embodies two conditions: (1) there is an identified asset in the contract that is land or a depreciable asset (i.e., property, plant, and equipment), and (2) the customer has the right to control the use of the identified asset. The lease liabilities are initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments. When leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the lease term. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Property and Equipment —Property and equipment is recorded at cost and depreciated over the estimated useful lives of the related assets using the straight-line method. Upon disposal of an asset, the related cost and accumulated depreciation are removed from the asset accounts and any resulting gain or loss is included in the consolidated statements of operations. Repair and maintenance costs are expensed as incurred, whereas major improvements are capitalized as additions to property and equipment. The estimated useful lives of the Company’s respective assets are as follows: Computer equipment and software 3 years Furniture and fixtures 7 years Laboratory equipment 5 years Leasehold improvements Shorter of the useful life of the asset or the life of the lease Impairment of Long-Lived Assets —Long-lived assets are reviewed for impairment if events or circumstances indicate the carrying amount of these assets may not be recoverable. If this review indicates that these assets will not be recoverable, based on the forecasted undiscounted future operating cash flows expected to result from the use of long-lived assets and their eventual disposition, the Company’s carrying value of the long-lived assets is reduced to fair value based on a discounted future cash flow approach or quoted market values. For the years ended December 31, 2021 and 2020, there were no events or circumstances which required an impairment test of long-lived assets. Convertible Preferred Stock —The Company records convertible preferred stock at fair value on the dates of issuance, net of issuance costs. The convertible preferred stock is recorded outside of stockholders’ deficit because the shares contain liquidation features that are not solely within the Company’s control. The Company has elected not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because it is uncertain whether or when an event would occur that would obligate the Company to pay the liquidation preferences to holders of shares of convertible preferred stock. Subsequent adjustments to the carrying values to the liquidation preferences will be made only when it becomes probable that such a liquidation event will occur. Research and Development Expenses and Accrued Research and Development —Research and development expenses are charged to expense as incurred. Research and development expenses include certain payroll and personnel expenses including stock-based compensation, laboratory supplies, consulting costs, external contract research and development expenses and facility or lease expenses. In-licensing fees and other costs to acquire technologies that are utilized in research and development, and that are not expected to have alternative future use, are expensed when incurred. Advance payments for goods or services for future research and development activities are deferred and expensed as the goods are delivered or the related services are performed. 86 The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on the Company’s behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers, the Company’s estimates of accrued expenses and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly. The estimates are trued up to reflect the best information available at the time of the financial statement issuance. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company’s estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary. Patent Costs —Costs related to filing and pursuing patent applications are expensed as incurred, as recoverability of such expenditures is uncertain. These patent-related legal costs are reported as a component of general and administrative expense. General and Administrative Expense —General and administrative costs are expensed as incurred and include employee-related expenses including salaries, benefits, travel and stock-based compensation for the Company’s personnel in executive, finance and accounting, and other administrative functions, as well as fees paid for legal, accounting and tax services, consulting fees and facilities costs not otherwise included in research and development expense. Legal costs include general corporate legal fees and patent costs. Fair Value Measurements —Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The carrying amounts of the Company’s financial instruments approximate fair value due to their short-term maturities. Stock-Based Compensation Expense —The Company accounts for stock-based compensation by measuring and recognizing compensation expense for all share-based payments made to employees, directors and non-employees based on estimated grant-date fair values. The Company uses the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite service period, which is generally the vesting period. The Company estimates the fair value of stock options to employees, directors and non-employees using the Black-Scholes option-valuation model. The Black-Scholes model requires the input of subjective assumptions, including expected volatility, expected dividend yield, expected term, risk-free rate of return, and the fair value of the underlying common stock on the date of grant. Due to the lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group of representative companies have characteristics similar to the Company, including stage of product development and focus on the life science industry. The Company uses the simplified method to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The simplified method is based on the vesting period and the contractual term for each grant, or for each vesting tranche for awards with graded vesting. The mid-point between the vesting date and the maximum contractual expiration date is used as the expected term under this method. For awards with multiple vesting-tranches, the times from grant until the mid-points for each of the tranches may be averaged to provide an overall expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company uses an assumed dividend yield of zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. The Company accounts for forfeitures as they occur. The fair value of restricted stock awards granted to employees are valued as of the grant date using the estimated fair value of the Company’s common stock. Net Loss per Share Attributable to Common Stockholders —The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to 87 common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares. Income Taxes —The Company accounts for income taxes using the asset and liability method. The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In evaluating the ability to recover its deferred income tax assets, the Company considers all available positive and negative evidence, including its operating results, ongoing tax planning and forecasts of future taxable income on a jurisdiction-by-jurisdiction basis. In the event the Company determines that it would be able to realize its deferred income tax assets in the future in excess of their net recorded amount, it would make an adjustment to the valuation allowance that would reduce the provision for income taxes. Conversely, in the event that all or part of the net deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period when such determination is made. As of December 31, 2021 and 2020, the Company has recorded a full valuation allowance on its deferred tax assets. Tax benefits related to uncertain tax positions are recognized when it is more likely than not that a tax position will be sustained during an audit. Interest and penalties related to unrecognized tax benefits are included within the provision for income tax. Recently Issued Accounting Pronouncements —From time to time, new accounting pronouncements are issued by the FASB, or other standard setting bodies and adopted by the Company as of the specified effective date. In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts With Customers. The ASU improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. Under the new ASU, acquiring entities are required to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The ASU is effective for fiscal years beginning after December 15, 2022 for public business entities, and for fiscal years beginning after December 15, 2023 for all other entities. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements and related disclosures. In August 2020, the FASB issued ASU 2020-06, Debt - Debt With Conversions and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. Under the new ASU, convertible instruments will now more frequently accounted for as a single unit of account. That is, a conversion feature and the host instrument in which it is embedded now generally will be treated as a single unit of account unless the conversion feature requires bifurcation under Topic 815. The ASU is effective for fiscal years beginning after December 15, 2021 for public business entities, and for fiscal years beginning after December 15, 2023 for all other entities. Early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its financial statements and related disclosures. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021. ASU 2019-12 is effective for the Company beginning January 1, 2022. Early adoption is permitted. The Company has early adopted this guidance in 2020 on a prospective basis and the impact on the Company’s financial statements was not material. 3. MILLENDO MERGER As described in Note 1, Private Tempest merged with the Company on June 25, 2021. The merger was accounted for as a reverse recapitalization with Private Tempest as the accounting acquirer. The primary pre-combination assets of Millendo were cash, cash equivalents and restricted cash. Under reverse recapitalization accounting, the assets and liabilities of Millendo were 88 recorded at their fair value which approximated book value due to the short-term nature of the instruments. No goodwill or intangible assets were recognized. Consequently, the consolidated financial statements of Tempest reflect the operations of Millendo for accounting purposes together with a deemed issuance of shares, equivalent to the shares held by the former stockholders of the legal acquirer and a recapitalization of the equity of the accounting acquirer. As part of the reverse recapitalization, the Company obtained approximately $ 17.0 million of cash, cash equivalents and restricted cash. The Company also obtained prepaids and other assets of approximately $ 1.4 million and assumed payables and accruals of approximately $ 0.5 million. The Company also acquired an operating lease right-of-use asset of $ 2.1 million and the related operating lease liability of $ 2.1 million. All of the development programs and associated collaboration arrangements were terminated prior to the merger and were deemed to have no value at the transaction date and the Company is winding down the legacy Millendo operations. In addition, the Company incurred approximately $ 0.2 million in share-based compensation expense as a result of the acceleration of vesting of stock options at the time of merger. This amount was recorded in general and administrative expense in the accompanying consolidated statements of operations for the year ended December 31, 2021. The Company also incurred transaction costs of approximately $ 6.4 million and this amount is recorded in additional paid-in capital in the accompanying consolidated statements of convertible preferred stock and stockholders’ equity (deficit) for the year ended December 31, 2021. 4. FAIR VALUE MEASUREMENTS The following tables present the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands): As of December 31, 2021 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 51,829 $ — $ — $ 51,829 Total $ 51,829 $ — $ — $ 51,829 As of December 31, 2020 Level 1 Level 2 Level 3 Total Cash and cash equivalents $ 18,820 $ — $ — $ 18,820 Total $ 18,820 $ — $ — $ 18,820 5. TRANSACTIONS WITH RELATED PARTIES (AMOUNTS IN THOUSANDS) Inception Sciences Service Agreements —Inception Sciences, Inc. ("Inception Sciences US") and Inception Sciences Canada, Inc. (Inception Sciences Canada) are subsidiaries of Versant Ventures, affiliates of which, together, are a holder of more than 5 % of our capital stock. The Company has service agreements with Inception Sciences US, and Inception Sciences Canada whereby research and support services are provided to the Company. On June 30, 2020, the Company terminated these Inception Sciences service agreements. Total expenses under the service agreements consist of charges for services, equipment usage, lab supplies and other out of pocket expenses as incurred. For the years ended December 31, 2021 and 2020, the Company incurred nil and $ 1,315 , respectively, in expenses under the Inception Sciences service agreements. Related Party Notes Receivable —On November 19, 2017, the Company loaned three employees a total of $ 353 pursuant to promissory notes in order for such employees to early exercise certain stock options which had a total exercise cost of $ 652 . The notes receivable accrue interest at 2 % per year and had a maturity date of November 29, 2022. The notes receivable vest over time until maturity in conjunction with the vesting of the early-exercised stock options. On June 25, 2021, prior to the closing of the Merger Agreement, one of the employees’ note receivable plus accrued interest totaling $ 278 was forgiven by the Company. This amount was recognized as compensation included in general and administrative expense in the accompanying consolidated statements of operations for the years ended December 31, 2021 and 2020. The remaining amounts of the notes were repaid. As of December 31, 2021 and 2020, the balance of the vested notes receivable and accrued interest was nil and $ 260 , respectively. 6. BALANCE SHEET ITEMS (AMOUNTS IN THOUSANDS) 89 Prepaid expenses and other current asset consist of the following as of December 31, 2021 and 2020: 2021 2020 Prepaid expenses $ 949 $ 245 Prepaid research and development costs 632 441 Notes and interest receivable — 260 Other current assets 553 59 Total $ 2,134 $ 1,005 Property and equipment, net, consists of the following as of December 31, 2021 and 2020: 2021 2020 Computer equipment and software $ 156 $ 85 Furniture and fixtures 193 135 Lab equipment 748 600 Leasehold improvements 840 746 Property and equipment 1,937 1,566 Less accumulated depreciation ( 824 ) ( 456 ) Property and equipment—net $ 1,113 $ 1,110 Depreciation expense for the years ended December 31, 2021 and 2020 were $ 374 and $ 339 , respectively. Accrued liabilities as of December 31, 2021 and 2020 consist of the following: 2021 2020 Accrued other liabilities $ 748 $ 441 Accrued clinical trial liability 841 224 $ 1,589 $ 665 7. COMMITMENTS AND CONTINGENCIES (AMOUNTS IN THOUSANDS) Facilities Lease Agreements —In February 2019, the Company entered into a 5-year office lease agreement for a 9,780 square feet facility in South San Francisco, California (“SSF Lease”). The remaining lease term of the SSF Lease is two years and two months as of December 31, 2021. As a result of the merger with Millendo, the Company assumed Millendo’s noncancelable operating leases for office space which have remaining lease terms of approximately 2.4 years. In February 2019 and October 2018, Millendo entered into two noncancellable operating leases for office space in Ann Arbor, Michigan (“Ann Arbor Leases”) of which one that Millendo took possession of in April 2019 and the other that Millendo took possession of in July 2019, respectively. One of its leases in Ann Arbor, Michigan expires in June 2024 and the other expires in March 2024. There were no other leases assumed by the Company as of December 31, 2021. As of December 31, 2021 and 2020, the balance of the operating lease right of use assets were $ 3,051 and $ 1,877 , respectively, and the related operating lease liability were $ 3,468 and $ 2,439 , respectively, as shown in the accompanying consolidated balance sheets. Rent expense was $ 1,039 and $ 665 for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, future minimum annual lease payments under the Company’s operating lease liabilities for the SSF Lease and Ann Arbor Leases were as follows: 90 Total Commitment Year Ending (in thousands) 2022 $ 1,603 2023 1,647 2024 443 Total minimum lease payments 3,693 Less: imputed interest ( 225 ) Present value of operating lease obligations 3,468 Less: current portion 1,442 Noncurrent operating lease obligations $ 2,026 Guarantees and Indemnifications —In the normal course of business, the Company enters into agreements that contain a variety of representations and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. As of December 31, 2021 and 2020, the Company does not have any material indemnification claims that were probable or reasonably possible and consequently has not recorded related liabilities. Legal Proceedings —Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. As a result of the merger with Millendo, the Company is party to various litigation matters given Millendo’s role as successor to OvaScience, Inc. (“OvaScience”). OvaScience merged with Millendo in 2018. Prior to the merger with Millendo, OvaScience was sued in three matters that are disclosed below. On November 9, 2016, a purported shareholder derivative action was filed in Massachusetts State court (Cima v. Dipp) against certain former officers and directors of OvaScience and OvaScience alleging breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets for purported actions related to OvaScience’s January 2015 follow-on public offering. No material proceedings have occurred since the case was filed. On February 25, 2022, the parties filed a joint status report with the Court. On March 24, 2017, a purported shareholder class action lawsuit was filed in Massachusetts Federal court (Dahhan v. OvaScience, Inc.) against OvaScience and certain former officers of OvaScience alleging violations of Sections 10(b) and 20(a) of the Exchange Act (the “Dahhan Action”). On March 4, 2022, the parties filed a motion to preliminarily approve a settlement of the action. The settlement amount of $ 15 million will be funded entirely by insurance. All defendants expressly deny liability. The settlement is subject to both preliminary and final approval. The amount of $ 15 million was recorded as Accrued legal settlement with offsetting Insurance recovery of legal settlement in the accompanying consolidated balance sheet as of December 31, 2021. On July 27, 2017, a purported shareholder derivative complaint was filed in Massachusetts Federal court (Chiu v. Dipp) against OvaScience and certain former officers and directors of OvaScience alleging breach of fiduciary duties, unjust enrichment and violations of Section 14(a) of the Exchange Act. related to OvaScience’s January 2015 follow-on public offering and other public statements concerning OvaScience’s AUGMENT treatment. Following the Court’s dismissal of an amended complaint, the parties agreed that plaintiffs could file a second amended complaint and that the case would be stayed pending the resolution of the Dahhan Action. In May 2018, the court entered an order staying this case pending the resolution of the Dahhan Action. With respect to the two OvaScience matters described above (Cima v. Dipp and Chiu v. Dipp), the Company is unable to estimate potential losses, if any. However, the Company believes the matters are without merit, and that in light of applicable insurance, any material exposure to the Company is remote. 8. LOAN PAYABLE (AMOUNTS IN THOUSANDS) On January 15, 2021, the Company entered into a loan agreement with a lender to borrow a term loan amount of $ 35,000 to be funded in three tranches. Tranche A of $ 15,000 was wired to the Company on January 15, 2021. Tranche B of $ 10,000 will be available through March 31, 2022 contingent upon achievement of each of the following: (i) receipt of at least $50,000 in Series 91 C equity capital, (ii) initiation of the Phase 1 combination study of TPST-1495 or monotherapy expansion study, and (iii) initiation of Phase 2 trial of TPST-1120 or the 1L Triplet Collaboration study . And Tranche C of $ 10,000 is available at lender’s option. The term loan matures on August 1, 2025 and has an annual floating interest rate of 7.15 % which is an Index Rate plus 7 %. Index Rate is the greater of (i) 30-day US LIBOR or (ii) 0.15 %. Monthly principal payments of $ 500 will begin on March 1, 2023. Related to this borrowing, the Company recorded loan discounts totaling $ 898 and paid $ 95 of debt issuance costs. These amounts would be amortized as additional interest expense over the life of the loan. As of December 31, 2021, the balance of the loan payable (net of debt issuance costs) was $ 15,069 . The carrying value of the loan approximates fair value (Level 2). For the year ended December 31, 2021, total interest expense was $ 1,282 . 9. CONVERTIBLE PREFERRED STOCK As of December 31, 2021, the Company was authorized to issue up to 5,000,000 shares of preferred stock at a par value of 0.001 as a result of Private Tempest completing the merger with Millendo on June 25, 2021. As of December 31, 2020, Private Tempest was authorized to issue up to 135,936,731 shares of preferred stock at par value of 0.001 . In October 2011, Private Tempest received a commitment from its venture investor for a Series A Preferred Stock financing totaling $10 million to be taken down in two tranches of $5 million each. Upon execution of the stock purchase agreement, Private Tempest received the first tranche of $5 million, which included $2,399 in cash proceeds and the conversion of notes payable and accrued interest totaling $2,601 for issuing 5,000,000 shares of its Series A Preferred Stock. In June 2012, Private Tempest received cash proceeds of $5 million related to the second tranche of the Series A Preferred Stock financing from the issuance of 5,000,000 shares of Series A Preferred Stock. In August 2015, Private Tempest issued an additional 2,000,000 shares of Series A Preferred Stock to its venture investor for cash proceeds of $2 million. In September 2016, Private Tempest issued an additional 5,000,000 shares of Series A Preferred Stock to its venture investor for cash proceeds of $5 million. In February 2018, Private Tempest issued 25,186,738 shares of Series B Preferred Stock for $1.00 per share in connection with the closing of the Series B Preferred Stock Purchase Agreement. Private Tempest’s convertible notes of $8 million and accrued interest were converted as part of the Series B offering. In February 2019, Private Tempest issued 28,749,997 shares of Series B-1 preferred stock for $0.80 per share for total cash proceeds of $23 million. In January 2020, Private Tempest issued 43,749,996 shares of Series B-1 preferred stock for $0.80 per share for total cash proceeds of $35 million. The authorized, issued and outstanding shares of the convertible preferred stock and liquidation preferences December 31, 2020 were as follows (in thousands except share and per share amounts): Series Shares Authorized Shares Issued and Outstanding Per Share Liquidation Preference Aggregate Liquidation Amount Proceeds Net of Issuance Cost Net Carrying Value Series A 17,000,000 17,000,000 $ 1.00 $ 17,000 $ 16,982 $ 16,982 Series B 25,186,738 25,186,738 1.00 25,187 24,943 12,235 Series B-1 93,749,993 72,499,993 0.80 58,000 57,489 57,489 135,936,731 114,686,731 $ 100,187 $ 99,414 $ 86,706 On June 25, 2021, Private Tempest completed the merger with Millendo in accordance with the Merger Agreement. Under the terms of the Merger Agreement, immediately prior to the effective time of the merger, each share Private Tempest’s preferred stock was converted into a share of Private Tempest’s common stock. At closing of the merger, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock. The significant rights, preferences, and privileges of the convertible preferred stock as of December 31, 2020 were as follows: 92 Dividends —The holders of the Company’s convertible preferred stock are entitled to receive noncumulative dividends of 8% per share (as adjusted for stock splits, combinations, and reorganizations) per annum on each outstanding share of Series convertible preferred stock. Such dividends shall be payable only when and if declared by the Board of Directors. As of December 31, 2020, and 2019, the Company’s Board of Directors had not declared any dividends. Dividends on convertible preferred stock shall be payable in preference to and prior to any payments of any dividends on common stock. No dividends have been declared to date. Voting Rights —The holders of preferred stock are entitled to one vote for each share of common stock into which such preferred stock could then be converted; and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of common stock. Liquidation —The holders of preferred stock are entitled to receive liquidation preferences at an amount per share of preferred stock equal to the original price plus all declared and unpaid dividends on the preferred stock. Liquidation payments to the holders of preferred stock have priority and are made in preference to any payments to the holders of common stock. After full payment of the liquidation preference to the holders of the preferred stock, the remaining assets, if any, will be distributed ratably to the holders of the common stock and preferred stock on an as-if-converted to common stock basis. Redemption and Balance Sheet Classification — The convertible preferred stock is recorded within mezzanine equity because while it is not mandatorily redeemable, it will become redeemable at the option of the stockholders upon the occurrence of certain deemed liquidation events that are considered not solely within the Company’s control. 10. COMMON STOCK Upon completion of the merger on June 25, 2021, the Company issued an aggregate of approximately 5,365,899 shares of its common stock to Private Tempest stockholders, based on an exchange ratio of 0.0322 shares of the Company’s common stock for each share of Private Tempest common stock outstanding immediately prior to the merger, including those shares of common stock issued upon conversion of the Private Tempest preferred stock ( 3,692,912 common shares) and those shares of common stock issued with its pre-merger financing of $ 30 million ( 1,136,849 common shares). As of December 31, 2021, the Company was authorized to issue 100,000,000 shares of common stock at a par value of $ 0.001 . Of the 100,000,000 common stock shares authorized, 6,910,324 are legally issued and outstanding at December 31, 2021 and there were no shares subject to repurchase due to remaining vesting requirements. Common stockholders are entitled to dividends as declared by the Board of Directors, subject to rights of holders of all classes of stock outstanding having priority rights as to dividends. There have been no dividends declared to date. The holders of each share of common stock are entitled to one vote. Except for effecting or validating certain specific actions intended to protect the preferred stockholders, the holders of common stock vote together with preferred stockholders and have the right to elect one member of the Company’s Board of Directors. On July 23, 2021, the Company entered into a sales agreement (the “Sales Agreement”) with Jefferies LLC (the “Agent”), pursuant to which the Company may sell, from time to time, up to an aggregate sales price of $ 100,000,000 of its common stock through the Agent. 11. STOCK COMPENSATION In 2011, Private Tempest adopted the 2011 Equity Incentive Plan, and in 2017, Private Tempest adopted the 2017 Equity Incentive Plan, together “the Tempest Equity Plans”. Upon adoption of the 2017 Equity Incentive Plan, the 2011 Equity Incentive Plan was terminated. The Board of Directors of Millendo adopted the 2019 Equity Incentive Plan (the “2019 Plan”) and 2019 Employee Stock Purchase Plan (the “2019 ESPP,” and together with the 2019 Plan, the “Millendo Equity Plans”) on April 29, 2019, subject to approval by the Company’s stockholders, and became effective with such stockholder approval on June 11, 2019. As a result of the merger, the Tempest Equity Plans and Millendo Equity Plans were assumed by the Company. Both the Tempest Equity Plans and the 2019 Plan allow the Company to grant stock awards to employees, directors and consultants of the Company, including incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), stock appreciation rights, restricted stock awards, restricted stock unit awards and other stock awards. The 2019 ESPP enables 93 employees to purchase shares of the Company's common stock through offerings of rights to purchase the Company’s common stock to all eligible employees. The number of shares of the Company's common stock reserved for issuance under the 2019 Plan will automatically increase on January 1st of each year, for a period of ten years , from January 1, 2020 continuing through January 1, 2029, by 4 % of the total number of shares of the Company's common stock outstanding on December 31 of the preceding calendar year, or a lesser number of shares as may be determined by the Board of Directors. The number of shares of the Company's common stock reserved for issuance under the 2019 ESPP will automatically increase on January 1st of each year, for a period of up to ten years , from January 1, 2020 continuing through January 1, 2029, by the lesser of (i) 0.01 of the total number of shares of the Company's capital stock outstanding on December 31 of the preceding calendar year, or (ii) 133,580 shares of the Company's common stock, unless a lesser number of shares is determined by the Board of Directors. The Company measures employee and nonemployee stock-based awards at grant date fair value and records compensation expense on a straight-line basis over the vesting period of the award. As of December 31, 2021, a total of 403,109 shares are available for future grant under the Tempest Equity Plans and the Millendo Equity Plans. Options to purchase the Company’s common stock may be granted at a price not less than the fair market value in the case of both NSOs and ISOs, except for an employee or non-employee with options who owns more than 10% of the voting power of all classes of stock of the Company, in which case the exercise price shall be no less than 110 % percent of the fair market value per share on the grant date. Stock options granted under the Plans generally vest over four years and expire no later than ten years from the date of grant. Vested options can be exercised at any time. Prior to the merger, the grant date fair market value of the shares of common stock underlying stock options had historically been determined by the Company’s Board of Directors. Up until the merger, there had been no public market for the Company’s common stock, and therefore the Board of Directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair market value, which included valuations performed by an independent third-party, important developments in the Company’s operations, sales of convertible preferred stock, actual operating results, financial performance, the conditions in the life sciences industry, the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of the Company’s common stock. The following shows the stock option activities for the years ended December 31, 2020 and 2021: Total Options Outstanding Weighted-Average Exercise Price Balance—December 31, 2019 264,924 $ 4.81 Granted 224,490 $ 5.90 Exercised ( 14,406 ) $ 4.76 Cancelled and forfeited ( 22,843 ) $ 4.92 Balance—December 31, 2020 452,165 $ 5.35 Assumed in reverse recapitalization 177,591 $ 179.79 Granted 307,529 $ 16.78 Exercised ( 33,127 ) $ 4.20 Cancelled and forfeited ( 113,521 ) $ 115.72 Balance—December 31, 2021 790,637 $ 32.82 The following table summarizes information about stock options outstanding at December 31, 2021: 94 Shares Weighted Average Remaining Contractual Life (In Years) Weighted Average Exercise Price Aggregate Intrinsic Value Options outstanding 790,637 8.53 $ 32.82 $ 62,820 Vested and expected to vest 790,476 8.53 $ 32.83 $ 62,820 Exercisable 339,921 7.99 $ 60.29 $ 42,790 Employee Stock Options —For the years ended December 31, 2021 and 2020, the Company granted employees stock options to purchase 290,894 and 210,100 shares of common stock with a weighted-average grant date fair value of $ 11.26 and $ 3.42 per share, respectively. As of December 31, 2021, there was total unrecognized compensation costs related to unvested employee stock options of $ 3,341 . These costs are expected to be recognized over a weighted-average period of approximately 1.4 years. The Company estimated the fair value of stock options using the Black-Scholes option pricing valuation model. The fair value of employee stock options is being amortized on the straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following assumptions for the years ended December 31, 2021 and 2020: 2021 2020 Expected term (in years) 5.7 - 6.1 6.0 - 6.1 Expected volatility 67 % - 69 % 62 % - 66 % Risk-free interest rate 0.9 % - 1.3 % 0.4 % - 0.5 % Dividends — % — % Expected Term —The expected term of options granted represents the period of time that the options are expected to be outstanding. Due to the lack of historical exercise history, the expected term of the Company’s employee stock options has been determined utilizing the simplified method for awards that qualify as plain-vanilla options. Expected Volatility —The expected stock price volatility assumption was determined by examining the historical volatilities for industry peers, as the Company did not have any trading history for the Company’s common stock. The Company will continue to analyze the historical stock price volatility and expected term assumption as more historical data for the Company’s common stock becomes available. Risk-Free Interest Rate —The risk-free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company’s stock options. Dividends —The Company has not paid any cash dividends on common stock since inception and does not anticipate paying any dividends in the foreseeable future. Consequently, an expected dividend yield of zero was used. Non-Employee Stock Options — For the years ended December 31, 2021 and 2020, the Company granted non-employees stock options to purchase 16,635 and 14,390 shares of common stock, respectively. As of December 31, 2021, there was total unrecognized compensation costs related to unvested non-employee stock options of $ 95 . These costs are expected to be recognized over a weighted-average period of approximately 1.3 years. Stock-Based Compensation Expense — The following table summarizes the components of stock-based compensation expense recognized in the Company’s consolidated statements of operations for the years ended December 31, 2021 and 2020: 2021 2020 Research and development $ 303 $ 389 General and administrative 802 64 Total $ 1,105 $ 453 12. INCOME TAXES 95 There was no provision for income taxes for the years ended December 31, 2021 and 2020, because the Company has incurred losses since inception. At December 31, 2021 and 2020 the Company concluded it was not more likely than not that it would realize its deferred tax assets, and therefore has recorded a full valuation allowance. For the years ended December 31, 2021 and 2020, income tax provision (benefit) related to continuing operations differ from the amounts computed by applying the statutory income tax rate of 21% to pre-tax loss as follows: U.S. federal provision (benefit) 2021 2020 At statutory rate $ ( 5,906 ) $ ( 4,033 ) State taxes ( 3,887 ) ( 1,799 ) Valuation allowance 9,154 6,395 Tax credits ( 767 ) ( 604 ) Stock-based compensation 1,366 37 Permanent differences 40 4 Total $ — $ — Significant components of the Company’s deferred tax assets at December 31, 2021 and 2020 are shown below. 2021 2020 Deferred tax assets: Net operating losses $ 125,111 $ 23,943 Research and development tax credits 16,670 4,597 Amortization 1,094 78 Lease liability 1,027 714 Stock based compensation 3,784 254 Other 254 204 Total gross deferred tax assets 147,940 29,790 Less: valuation allowance ( 146,933 ) ( 29,073 ) Total deferred tax assets 1,007 717 Deferred tax liability: Right-of-use assets ( 903 ) ( 550 ) Fixed assets ( 104 ) ( 167 ) Total gross deferred tax liabilities ( 1,007 ) ( 717 ) Net deferred tax assets $ — $ — The deferred tax assets and valuation allowance increased by $ 117.9 million from December 31, 2020 to December 31, 2021 due primarily to the Millendo reverse merger, the generation of net operating losses, and research and development credits. As of December 31, 2021, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $ 452.4 million and $ 394.1 million, respectively. As of December 31, 2020, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $ 80.9 million and $ 80.3 million, respectively. The federal and state net operating loss carryforwards begin to expire in 2031 and 2022, respectively, if not utilized. Federal net operating losses of $ 231.2 million are not subject to expiration. As of December 31, 2021, the Company has federal and state research and development carryforwards of approximately $ 10.2 million and $ 3.2 million, respectively. The Company also has $ 7.4 million of Orphan Drug Credit. As of December 31, 2020, the Company has federal and state research and development carryforwards of approximately $ 3.9 million and $ 1.9 million, respectively. The federal and state credits begin to expire in 2031 and 2029, respectively, if not utilized; $ 2.1 million of the state credits can be carried forward indefinitely. 96 Utilization of some of the federal and state net operating loss and credit carryforwards may be subject to annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of net operating losses and credits before utilization. The Company has not performed a Section 382 study as of December 31, 2021. At least $ 455.8 thousand of legacy Millendo federal net operating losses are expected to expire unused due to prior ownership changes. The Company has the following activity relating to unrecognized tax benefits as of December 31, 2021 and 2020: 2021 2020 Beginning balance $ 1,280 $ 1,080 Gross increase - tax positions in prior periods 2,767 — Gross decrease - tax positions in prior periods — — Gross increase - tax position in current period 246 $ 200 Settlements — — Lapses in statutes of limitations — — Ending balance $ 4,293 $ 1,280 As of December 31, 2021 and 2020, none of the unrecognized tax benefits would impact the Company's effective tax rate due to the valuation allowance. The Company does not anticipate the uncertain tax positions will materially change in the next 12 months. The Company’s practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest and penalties on the accompanying consolidated balance sheets as of December 31, 2021 and 2020, respectively, and has not recognized penalties and interest in the accompanying statements of operations for the years ended December 31, 2021 and 2020, respectively. The Company is subject to taxation in the United States, California, Massachusetts, and Michigan. The Company’s tax years from inception are subject to examination by the IRS and state tax authorities due to the carryforward of unutilized net operating losses and research and development credits. 13. RETIREMENT PLAN The Company participates in a qualified 401(k) Plan sponsored by its professional service organization. The retirement plan is a defined contribution plan covering eligible employees. Participants may contribute a portion of their annual compensation limited to a maximum annual amount set by the Internal Revenue Service. There was no contribution from the Company for the years ended December 31, 2021 and 2020. 14. NET LOSS PER SHARE The following table sets forth the computation of the Company’s basic and diluted net loss per share for the years ended December 31, 2021 and 2020 (in thousands except share and per share amounts): Numerator: 2021 2020 Net loss $ ( 28,302 ) $ ( 19,208 ) Denominator: Weighted-average common shares outstanding 3,799,392 521,146 Less: Weighted-average unvested restricted shares and shares subject to repurchase ( 9,089 ) ( 52,985 ) Weighted-average shares used to computing basic and diluted net loss per share 3,790,303 468,161 Net loss per share attributable to common stockholders—basic and diluted $ ( 7.47 ) $ ( 41.03 ) As of December 31, 2021 and 2020, the Company’s potentially dilutive securities included unvested stock warrants and stock options, which have been excluded from the computation of diluted net loss per share attributable to common stockholders as the effect would be anti-dilutive. Based on the amounts outstanding as of December 31, 2021 and 2020, the Company excluded 97 the following potential common shares from the computation of diluted net loss per share attributable to common stockholders because including them would have had an anti-dilutive effect: 2021 2020 Series A preferred stock — 547,400 Series B preferred stock — 811,013 Series B-1 preferred stock — 2,334,500 Options to purchase common stock 790,637 452,166 Unvested restricted common stock — 28,996 Common stock warrants 6,036 — 796,673 4,174,075 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.