SEC Filing | Spruce Biosciences

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________

Commission File Number: 001-39594

Spruce Biosciences, Inc.

(Exact name of registrant as specified in its charter)


Delaware	81-2154263
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
611 Gateway Boulevard, Suite 740 South San Francisco, California	94080
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (415) 655-4168

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading
Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

SPRB

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 9, 2023, the registrant had 40,710,692 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

Summary of Risks Associated With Our Business


		Page

PART I.	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Financial Statements	1
	Condensed Balance Sheets	1
	Condensed Statements of Operations and Comprehensive Loss	2
	Condensed Statements of Stockholders’ Equity	3
	Condensed Statements of Cash Flows	5
	Notes to the Unaudited Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchase of Equity Securities	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	76
	Signatures	77

SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS

We face risks and uncertainties associated with our business, many of which are beyond our control. Some of the material risks associated with our business include the following:

▪

We have a limited operating history, have incurred significant net losses since our inception, and anticipate that we will continue to incur significant net losses for the foreseeable future. We expect these losses to increase as we continue our clinical development of, and seek regulatory approvals for, tildacerfont and any future product candidates.

▪

We will need substantial additional financing to develop tildacerfont and any future product candidates and implement our operating plans. If we fail to obtain additional financing, we may be forced to delay, reduce or eliminate our product development programs or commercialization efforts.

▪

We currently depend entirely on the success of tildacerfont, which is our only product candidate. If we are unable to advance tildacerfont in clinical development, obtain regulatory approval, and ultimately commercialize tildacerfont, or experience significant delays in doing so, our business will be materially harmed.

▪

Our clinical trials may fail to adequately demonstrate the safety and efficacy of tildacerfont, which could prevent or delay regulatory approval and commercialization.

▪

Any delays in the commencement or completion, or termination or suspension, of our clinical trials could result in increased costs to us, delay or limit our ability to generate revenue, and adversely affect our commercial prospects.

▪

The U.S. Food and Drug Administration (“FDA”) and comparable foreign regulatory authorities may require us to initiate one or more additional clinical trials for tildacerfont in adult patients with classic congenital adrenal hyperplasia (“CAH”), including a Phase 3 clinical trial or trials. The estimated timing or scope of any such future clinical trials is not currently ascertainable. Even if regulatory approvals are obtained, we may never be able to successfully commercialize tildacerfont.

▪

Preclinical and clinical drug development involves a lengthy and expensive process with uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results. We may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of tildacerfont and any future product candidates.

▪

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

▪

Unfavorable U.S. and global economic and geopolitical conditions could adversely affect our business, financial condition or results of operations.

▪

Tildacerfont is, and any future product candidates will be, subject to extensive regulation and compliance obligations, which are costly and time-consuming, and such regulation may cause unanticipated delays or prevent the receipt of the required approvals to commercialize tildacerfont and any future product candidates.

▪

If the market opportunities for tildacerfont and any future product candidates are smaller than we believe they are, our future revenue may be adversely affected, and our business may suffer.

▪

We may not be successful in our efforts to expand our pipeline by identifying additional indications and formulations for which to investigate tildacerfont in the future. We may expend our limited resources to pursue a particular indication or formulation for tildacerfont and fail to capitalize on product candidates, indications, or formulations that may be more profitable or for which there is a greater likelihood of success.

▪

We currently have no marketing and sales organization and have yet to commercialize a product. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell tildacerfont and any future product candidates, we may not be able to generate product revenues.

▪

We are highly dependent on our key personnel, and if we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

▪

We rely on third parties to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize tildacerfont.

▪

If we are unable to obtain and maintain sufficient intellectual property protection for tildacerfont, any future product candidates, and other proprietary technologies we develop, or if the scope of the intellectual property protection obtained is not sufficiently broad, our competitors could develop and commercialize products similar or identical to ours, and our ability to successfully commercialize tildacerfont, if approved, and any future product candidates, and other proprietary technologies if approved, may be adversely affected.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

SPRUCE BIOSCIENCES, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share amounts)


	September 30,			December 31,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	98,801		$	24,487
Short-term investments		9,231			54,590
Prepaid expenses		2,687			3,320
Other current assets		419			1,211
Total current assets		111,138			83,608
Right-of-use assets		1,240			1,400
Other assets		607			640
Total assets	$	112,985		$	85,648
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,152		$	1,426
Accrued expenses and other current liabilities		11,616			9,399
Term loan, current portion		1,622			1,622
Deferred revenue, current portion		7,798			—
Total current liabilities		24,188			12,447
Lease liabilities, net of current portion		1,083			1,261
Term loan, net of current portion		2,113			3,293
Other liabilities		220			161
Total liabilities		27,604			17,162
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value; 10,000,000 shares authorized and no shares issued or outstanding as of September 30, 2023 and December 31, 2022		—			—
Common stock, $0.0001 par value; 200,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 40,710,692 and 23,601,004 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively		4			3
Additional paid-in capital		272,662			218,354
Accumulated other comprehensive loss		(3	)		(558	)
Accumulated deficit		(187,282	)		(149,313	)
Total stockholders’ equity		85,381			68,486
Total liabilities and stockholders’ equity	$	112,985		$	85,648

See accompanying notes to the condensed financial statements.

SPRUCE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Collaboration revenue	$	3,073		$	—		$	7,202		$	—
Operating expenses:
Research and development		13,494			8,791			38,332			26,359
General and administrative		3,237			2,766			9,699			8,814
Total operating expenses		16,731			11,557			48,031			35,173
Loss from operations		(13,658	)		(11,557	)		(40,829	)		(35,173	)
Interest expense		(119	)		(110	)		(377	)		(291	)
Interest and other income, net		1,423			266			3,237			428
Net loss		(12,354	)		(11,401	)		(37,969	)		(35,036	)
Other comprehensive gain (loss), net of tax:
Unrealized gain (loss) on available for sale securities		52			(28	)		555			(689	)
Total comprehensive loss	$	(12,302	)	$	(11,429	)	$	(37,414	)	$	(35,725	)
Net loss per share, basic and diluted	$	(0.30	)	$	(0.48	)	$	(1.01	)	$	(1.49	)
Weighted-average shares of common stock outstanding, basic and diluted		40,710,692			23,560,250			37,751,865			23,515,651

See accompanying notes to the condensed financial statements.

SPRUCE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except share amounts)


					Additional		Accumulated Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Loss			Deficit			Equity
Balance as of June 30, 2023		40,710,692	$	4	$	271,540	$	(55	)	$	(174,928	)	$	96,561
Stock-based compensation		—		—		1,122		—			—			1,122
Unrealized gain on available for sale securities		—		—		—		52			—			52
Net loss		—		—		—		—			(12,354	)		(12,354	)
Balance as of September 30, 2023		40,710,692	$	4	$	272,662	$	(3	)	$	(187,282	)	$	85,381


					Additional			Accumulated Other						Total
	Common Stock				Paid-In			Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital			Loss			Deficit			Equity
Balance as of January 1, 2023		23,601,004	$	3	$	218,354		$	(558	)	$	(149,313	)	$	68,486
Exercise of pre-funded warrants		800,000		—		8			—			—			8
Issuance of common stock related to employee stock purchase plan		102,984		—		99			—			—			99
Issuance of common stock related to vesting of restricted stock units, net of tax withholdings		90,704		—		(94	)		—			—			(94	)
Issuance of common stock and warrants, net of offering costs of $2,721		16,116,000		1		50,894			—			—			50,895
Stock-based compensation		—		—		3,401			—			—			3,401
Unrealized gain on available for sale securities		—		—		—			555			—			555
Net loss		—		—		—			—			(37,969	)		(37,969	)
Balance as of September 30, 2023		40,710,692	$	4	$	272,662		$	(3	)	$	(187,282	)	$	85,381

See accompanying notes to the condensed financial statements.

SPRUCE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

(in thousands, except share amounts)


					Additional		Accumulated Other						Total
	Common Stock				Paid-In		Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital		Loss			Deficit			Equity
Balance as of June 30, 2022		23,560,250	$	3	$	216,731	$	(845	)	$	(126,768	)	$	89,121
Stock-based compensation		—		—		783		—			—			783
Unrealized loss on available for sale securities		—		—		—		(28	)		—			(28	)
Net loss		—		—		—		—			(11,401	)		(11,401	)
Balance as of September 30, 2022		23,560,250	$	3	$	217,514	$	(873	)	$	(138,169	)	$	78,475


					Additional			Accumulated Other						Total
	Common Stock				Paid-In			Comprehensive			Accumulated			Stockholders’
	Shares		Amount		Capital			Loss			Deficit			Equity
Balance as of January 1, 2022		23,491,881	$	3	$	214,685		$	(184	)	$	(103,133	)	$	111,371
Exercise of common stock options		992		—		2			—			—			2
Issuance of common stock related to employee stock purchase plan		25,545		—		38			—			—			38
Issuance of common stock related to vesting of restricted stock units, net of tax withholdings		41,832		—		(40	)		—			—			(40	)
Stock-based compensation		—		—		2,829			—			—			2,829
Unrealized loss on available for sale securities		—		—		—			(689	)		—			(689	)
Net loss		—		—		—			—			(35,036	)		(35,036	)
Balance as of September 30, 2022		23,560,250	$	3	$	217,514		$	(873	)	$	(138,169	)	$	78,475

See accompanying notes to the condensed financial statements.

SPRUCE BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023			2022
Operating activities
Net loss	$	(37,969	)	$	(35,036	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,401			2,829
Depreciation and amortization		54			50
Net amortization (accretion) of premium/discount on available-for-sale securities		(570	)		109
Non-cash lease expense		171			250
Loss on disposal of property and equipment		2			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		945			140
Other assets		110			78
Accounts payable		1,726			(642	)
Accrued expenses and other current liabilities		2,394			2,506
Deferred revenue		7,798			—
Other liabilities		(128	)		(229	)
Net cash used in operating activities		(22,066	)		(29,945	)
Investing activities
Purchases of investments		(11,881	)		(33,869	)
Purchases of property and equipment		(7	)		(8	)
Proceeds from maturities of investments		58,365			43,000
Net cash provided by investing activities		46,477			9,123
Financing activities
Proceeds from issuance of common stock and warrants		53,616			—
Proceeds from issuance of common stock related to employee stock purchase plan		99			38
Proceeds from exercise of pre-funded warrants		8			—
Proceeds from exercise of common stock options		—			2
Tax withholding payments on restricted stock units		(94	)		(40	)
Repayment of term loan		(1,216	)		—
Payment of offering costs		(2,721	)		(277	)
Net cash provided by (used in) financing activities		49,692			(277	)
Net increase in cash, cash equivalents, and restricted cash		74,103			(21,099	)
Cash, cash equivalents, and restricted cash at beginning of period		24,732			42,964
Cash, cash equivalents, and restricted cash at end of period	$	98,835		$	21,865
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	98,801		$	21,649
Restricted cash, long-term (included in other assets)		34			216
Total cash, cash equivalents, and restricted cash	$	98,835		$	21,865

See accompanying notes to the condensed financial statements.

SPRUCE BIOSCIENCES, INC.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Principal Activities

Description of Business

Spruce Biosciences, Inc. (the “Company”) is a late-stage biopharmaceutical company focused on developing and commercializing novel therapies for rare endocrine disorders with significant unmet medical need. The Company is initially developing its wholly-owned product candidate, tildacerfont, as the potential first non-steroidal therapy for patients suffering from classic congenital adrenal hyperplasia (“CAH”). The Company is also developing tildacerfont for females suffering from polycystic ovary syndrome (“PCOS”). The Company is located in South San Francisco, California and was incorporated in the state of Delaware in April 2016.

Private Placement of Common Stock and Warrants

In February 2023, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Purchasers”), pursuant to which the Company agreed to sell and issue (i) 16,116,000 shares of the Company’s common stock (“Common Stock”), (ii) pre-funded warrants to purchase 800,000 shares of Common Stock (the “Pre-Funded Warrants”) to a Purchaser and (iii) 12,687,000 warrants to purchase Common Stock (the “Standard Warrants” and together with the Pre-Funded Warrants, the “Warrants”) in a private placement transaction (the “Private Placement”). The total gross proceeds to the Company were approximately $53.6 million, which does not include any proceeds that may be received upon exercise of the Standard Warrants.

Open Market Sales Agreement

In February 2022, the U.S. Securities and Exchange Commission (“SEC”) declared effective a registration statement on Form S-3 (the “Shelf Registration”), covering the sale of up to $200.0 million of our securities. Also, in February 2022, we entered into an Open Market Sales AgreementSM (the “Sales Agreement”) with Jefferies LLC (“Jefferies”) pursuant to which we may elect to issue and sell, from time to time, shares of Common Stock having an aggregate offering price of up to $21.0 million under the Shelf Registration through Jefferies acting as the sales agent and/or principal. As of September 30, 2023, we have not issued any shares of Common Stock under the Sales Agreement.

Liquidity and Capital Resources

The Company believes that based on its current operating plan, its cash, cash equivalents and investments of $108.0 million as of September 30, 2023 will be sufficient to fund its planned operations and debt obligations for at least 12 months following the issuance date of these financial statements.

The Company has incurred significant losses and negative cash flows from operations. During the nine months ended September 30, 2023, the Company incurred a net loss of $38.0 million and used $22.1 million of cash in operations. As of September 30, 2023, the Company had an accumulated deficit of $187.3 million and does not expect positive cash flows from operations in the foreseeable future. The Company has funded its operations primarily through the issuance and sale of equity securities, debt and collaboration revenue.

The Company anticipates that it will need to raise substantial additional financing in the future to fund its operations. In order to meet these additional cash requirements, the Company may seek to out-license rights to develop and commercialize tildacerfont or sell additional equity or issue debt, convertible debt or other securities that may result in dilution to its stockholders. If the Company raises additional funds through the issuance of debt or convertible debt securities, these securities could have rights senior to those of its shares of Common Stock and could contain covenants that restrict its operations. There can be no assurance that the Company will be able to obtain additional equity or debt financing on terms acceptable to it, if at all. Additional debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting the Company’s ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. The Company’s failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on its business, results of operations, and financial condition.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the SEC for interim reporting. As permitted under those rules and

regulations, certain notes or other financial information normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The condensed balance sheet as of September 30, 2023, the condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2023 and 2022, the condensed statement of stockholders’ equity for the three and nine months ended September 30, 2023 and 2022, and the condensed statements of cash flows for the nine months ended September 30, 2023 and 2022 are unaudited. The interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal, recurring adjustments that are necessary to present fairly the Company’s results for the interim periods presented. The condensed balance sheet as of December 31, 2022 is derived from the Company’s audited financial statements. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023, or for any other future annual or interim period.

These interim condensed financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 16, 2023 (“Annual Report”).

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses as well as related disclosure of contingent assets and liabilities. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, accrued research and development expenses, revenue recognition, stock-based compensation, and uncertain tax positions. The Company bases its estimates on its historical experience and on assumptions that it believes are reasonable; however, actual results could significantly differ from those estimates.

Risks and Uncertainties

Any product candidates developed by the Company will require approvals from the U.S. Food and Drug Administration (“FDA”) or foreign regulatory agencies prior to commercial sales. There can be no assurance that the Company’s current and future product candidates will meet desired efficacy and safety requirements to obtain the necessary approvals. If approval is denied or delayed, it may have a material adverse impact on the Company’s business and its financial statements.

The Company is subject to a number of risks similar to other late-stage biopharmaceutical companies including, but not limited to, dependency on the clinical success of the Company’s product candidate, tildacerfont, ability to obtain regulatory approval of tildacerfont, the need for substantial additional financing to achieve its goals, uncertainty of broad adoption of its approved products, if any, by physicians and consumers, significant competition, untested manufacturing capabilities, and dependence on key individuals and sole source suppliers.

Global economic and business activities continue to face widespread macroeconomic and geopolitical uncertainties, including recent and potential future disruptions in access to bank deposits or lending commitments due to bank failures, labor shortages, inflation and monetary supply shifts, recession risks and potential disruptions from the ongoing wars in Ukraine and Israel and related sanctions. The Company continues to actively monitor the impact of these macroeconomic and geopolitical factors on its financial condition, liquidity, operations, and workforce. The extent of the impact of these factors on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time frame, will depend on future developments, which are uncertain and cannot be predicted; however, any continued or renewed disruption resulting from these factors could negatively impact the Company’s business.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentration of credit risk, consist primarily of cash, cash equivalents and investments. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash and cash equivalents to the extent recorded in the condensed balance sheets.

Significant Accounting Policies

There have been no significant changes to the significant accounting policies during the three and nine months ended September 30, 2023, as compared to the significant accounting policies described in the Annual Report, with exception to the below policies.

Investments

The Company adopted Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2023. The Company’s investments are classified as available-for-sale and carried at estimated fair values and reported in cash equivalents, short-term investments, or long-term investments. Management determines the appropriate

classification of the investments at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. Investments with contractual maturities greater than 12 months are considered long-term investments.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value and recognized in interest and other income, net in the statement of operations and comprehensive loss. If neither criteria is met, the Company evaluates whether the decline in fair value is related to credit-related factors or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. Credit-related impairment losses, limited by the amount that the fair value is less than the amortized cost basis, are recorded through an allowance for credit losses in interest and other income, net.

Any unrealized losses from declines in fair value below the amortized cost basis as a result of non-credit factors are recognized in accumulated other comprehensive loss, net of tax as a separate component of stockholders’ equity, along with unrealized gains. Realized gains and losses and declines in fair value, if any, on available-for-sale securities are included in interest and other income, net in the statement of operations and comprehensive loss.

For purposes of identifying and measuring credit-related impairments, the Company’s policy is to exclude applicable accrued interest from both the fair value and amortized cost basis of the related security. The Company has elected to write-off uncollectible accrued interest receivable balances in a timely manner, which is defined by the Company as when interest due becomes 90 days delinquent. The accrued interest write-off will be recorded by reversing interest income. Accrued interest receivable is recorded in other current assets on the condensed balance sheets.

Revenue Recognition

The Company recognizes revenues when, or as, the promised goods or services are transferred to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services. To determine revenue recognition for arrangements, the Company performs the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligation(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) in the contract; and (5) recognize revenue when (or as) the performance obligation(s) are satisfied.

The Company has entered into a licensing and collaboration agreement that primarily includes the following: (i) upfront cash consideration; (ii) payments associated with achieving certain milestones; and (iii) royalties based on specified percentages of net product sales, if any. At the initiation of an agreement, the Company analyzes each unit of account within the contract to determine if the counterparty is a customer in the context of the unit of account.

At contract inception, the Company assesses the goods or services promised and enforceable in a contract with a customer and identifies those distinct goods and services that represent a performance obligation. If a promised good or service is not distinct, the Company combines that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. Promised goods and services that are not material in the context of the contract are not considered performance obligations. Additional goods or services that are exercisable at a customer’s discretion are assessed to determine if they provide a material right to the customer and if so, they are considered performance obligations.

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. Non-refundable upfront payments are considered fixed consideration and included in the transaction price. At the inception of arrangements that include variable consideration, the Company uses judgment to estimate the amount of variable consideration to include in the transaction price using the most likely method. If it is probable that a significant revenue reversal will not occur, then the estimated amount is included in the transaction price. Milestone payments that are not within the Company’s or the licensee’s control, such as regulatory approvals, are not included in the transaction price until those approvals are received. For arrangements with licenses of intellectual property that include sales-based royalties, including milestone payments based on the level of sales, and if the license is deemed to be the predominant item to which the royalties relate, the Company recognizes royalty revenue and sales-based milestones at the later of (i) when the related sales occur, or (ii) when the performance obligation to which the royalty has been allocated has been satisfied. At the end of each reporting period, the Company re-evaluates the estimated variable consideration included in the transaction price and any related constraint and, as necessary, adjusts the estimate of the overall transaction price. Any adjustments will be recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment.

If it is determined that multiple performance obligations exist, the transaction price is allocated at the inception of the agreement to all identified performance obligations based on the relative standalone selling prices, unless the consideration is variable and meets the criteria to be allocated entirely to one or more, but not all, performance obligations in the contract. Other components of the transaction price are allocated based on the relative standalone selling price, over which the Company applies significant judgment.

The Company develops assumptions that require judgment to determine the standalone selling price for license-related performance obligations under the adjusted market assessment approach, which may include forecasted revenues, development timelines, discount rates and probabilities of success.

Revenue is recognized when, or as, the Company satisfies a performance obligation. The Company recognizes revenue over time by measuring the progress toward complete satisfaction of the relevant performance obligation using an appropriate input method based on the nature of the good or service promised to the customer. The Company uses judgment to assess the nature of the performance obligation to determine whether the performance obligation is satisfied over time or at a point in time. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided.

If a customer pays consideration, or the Company has an unconditional right to the consideration, before the satisfaction of the revenue recognition criteria, the amounts are recorded as deferred revenue in the Company’s condensed balance sheet. The current portion of deferred revenue represents the amount of the performance obligation that is expected to be satisfied within the next twelve months. Amounts recognized as revenue prior to receipt or before they are due are recorded as contract assets in the Company’s condensed balance sheet, excluding any amounts presented as accounts receivable. If the Company has an unconditional right to receive consideration, the contract assets are accounted for as accounts receivable and presented separately from contract assets. A net contract asset or liability is presented for each contract with a customer.

Emerging Growth Company Status

The Company is an emerging growth company (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is based on historical experience, current conditions, and reasonable and supportable forecasts that affect collectability. ASU 2016-13 also eliminates the concept of “other-than-temporary” impairment when evaluating available-for-sale debt securities and instead focuses on determining whether any impairment is a result of a credit loss or other factors. An entity will recognize an allowance for credit losses on available-for-sale debt securities rather than an other-than-temporary impairment that reduces the cost basis of the investment. The Company adopted ASU 2016-13 on January 1, 2023 and the adoption did not have any impact on the Company’s financial statements.

3. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows:

Level 1 — Quoted prices in active markets for identical assets and liabilities;

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company classifies money market funds, U.S. government treasury securities, and U.S. government agency securities as Level 1 investments as the Company uses quoted prices in active markets for identical assets to determine the fair value. The Company classifies corporate bonds as Level 2 investments as the Company uses quoted prices for similar assets sourced from certain third-party pricing services. The third-party pricing services generally utilize industry standard valuation models for

which all significant inputs are observable, either directly or indirectly, to estimate the price or fair value of the securities. The primary input generally includes reported trades of or quotes on the same or similar securities. The Company does not make additional judgments or assumptions made to the pricing data sourced from the third-party pricing services.

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):


		September 30, 2023
	Fair Value Hierarchy Level	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	Level 1	$	95,820	$	—	$	—		$	95,820
Total cash equivalents			95,820		—		—			95,820
U.S. government treasury securities	Level 1		4,264		—		(4	)		4,260
U.S. government agency securities	Level 2		4,970		1		—