SEC Filing - Keros Therapeutics

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kros-20200331

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 March 31, 2020


☐			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: 001-39264

________________________________________

KEROS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

________________________________________


Delaware						81-1173868
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)
99 Hayden Avenue, Suite 120, Building E Lexington, Massachusetts						02421
(Address of principal executive offices)						(Zip Code)

Tel: (617) 314-6297

(Registrant's telephone number, including area code)

________________________________________

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

KROS

The Nasdaq Stock Market LLC

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, a 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.

Large Accelerated Filer

☐

Accelerated Filer

☐

Non-Accelerated Filer

☑

Smaller Reporting Company

☑

Emerging Growth Company

☑

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 May 15, 2020, there were 20,148,663 outstanding shares of the registrant's common stock, par value $0.0001 per share.

TABLE OF CONTENTS


		Page
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS			2
SPECIAL NOTE REGARDING COMPANY REFERENCES			3
SPECIAL NOTE REGARDING TRADEMARKS			3

PART I.	FINANCIAL INFORMATION	4
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION	29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Recent Sales of Unregistered Securities	81
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	82
Item 6.	Exhibits	83
Signatures

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements, including statements about:

▪the timing of initiation for our two Phase 2 clinical trials for our lead protein therapeutic product candidate, KER-050;

▪the timing of completion of our ongoing Phase 1 clinical trial and the timing of initiation for future clinical trials for our lead small molecule product candidate, KER-047, including the timing of initiation of our two Phase 2 clinical trials of KER-047;

▪the timing of initiation of our Phase 1 clinical trial for our third product candidate, KER-012;

▪our ability to receive the required regulatory approvals and clearances to successfully market and sell our products in the United States and certain other countries;

▪our ability to successfully advance our pipeline of additional product candidates;

▪our ability to develop sales and marketing capabilities;

▪the rate and degree of market acceptance of any products we are able to commercialize;

▪our ability to develop sales and marketing capabilities;

▪the effects of increased competition as well as innovations by new and existing competitors in our market;

▪our ability to obtain funding for our operations;

▪our ability to establish and maintain collaborations;

▪our ability to effectively manage our anticipated growth;

▪our ability to maintain, protect and enhance our intellectual property rights and proprietary technologies;

▪our ability to operate our business without infringing the intellectual property rights and proprietary technology of third parties;

▪costs associated with defending intellectual property infringement, product liability and other claims;

▪regulatory developments in the United States, Australia and other foreign countries;

▪risks associated with the COVID-19 pandemic, which may adversely impact our business, preclinical studies and clinical trials;

▪our ability to attract and retain qualified employees;

▪our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012;

▪statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and stock performance; and

▪the future trading prices of our common stock and the impact of securities analysts’ reports on these prices.

In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

You should read the section titled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. As a result of these factors, we cannot assure you that the forward-looking statements in this Quarterly Report on Form 10-Q will prove to be accurate. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

You should read this Quarterly Report on Form 10-Q, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

SPECIAL NOTE REGARDING COMPANY REFERENCES

Throughout this Quarterly Report on Form 10-Q, “Keros,” the “Company,” “we,” “us” and “our” refer to Keros Therapeutics, Inc. and its subsidiary.

SPECIAL NOTE REGARDING TRADEMARKS

All trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (unaudited)

KEROS THERAPEUTICS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)


	MARCH 31, 2020		DECEMBER 31, 2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	54,518	$	7,020
Prepaid expenses and other current assets	1,197		381
Deferred IPO costs	2,019		604
Research and development incentive receivable	805		922
Total current assets	58,539		8,927
Operating lease right-of-use assets	1,116		1,205
Property and equipment, net	822		708
Restricted cash	115		115
TOTAL ASSETS	$	60,592	$	10,955

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	2,426	$	2,088
Current portion of operating lease liabilities	388		376
Accrued expenses and other current liabilities	6,022		2,022
Total current liabilities	8,836		4,486
Operating lease liabilities, net of current portion	797		899
Preferred stock tranche liability	—		4,956
Other liabilities	104		119
Total liabilities	9,737		10,460
COMMITMENTS AND CONTINGENCIES
Series A convertible preferred stock, par value of $0.0001 per share; 10,000,000 shares authorized as of March 31, 2020 and December 31, 2019; 4,607,652 shares issued and outstanding as of March 31, 2020 and December 31, 2019; liquidation and redemption value of $12,471 as of March 31, 2020	9,891		9,891
Series A-1 convertible preferred stock, par value of $0.0001 per share; 800,000 shares authorized as of March 31, 2020 and December 31, 2019; 368,612 shares issued and outstanding as of March 31, 2020 and December 31, 2019; liquidation and redemption value of $1,191 as of March 31, 2020	944		944
Series B-1 convertible preferred stock, par value of $0.0001 per share; 3,427,004 shares authorized as of March 31, 2020 and December 31, 2019; 1,579,043 shares issued and outstanding as of March 31, 2020 and December 31, 2019; liquidation and redemption value of $12,826 as of March 31, 2020	9,106		9,106
Series C convertible preferred stock, par value of $0.0001 per share; 9,049,783 and 0 shares authorized as of March 31, 2020 and December 31, 2019, respectively; 4,169,822 and 0 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively; liquidation and redemption value of $56,356 as of March 31, 2020	55,781		—
STOCKHOLDERS' DEFICIT:
Common stock, par value of $0.0001 per share; 35,000,000 and 27,000,000 shares authorized as of March 31, 2020 and December 31, 2019, respectively; 2,491,670 and 2,429,705 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	1		1
Additional paid-in capital	6,674		203
Accumulated deficit	(31,542)		(19,650)
Total stockholders' deficit	(24,867)		(19,446)
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT	$	60,592	$	10,955

See notes to condensed consolidated financial statements.

KEROS THERAPEUTICS, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)


	THREE MONTHS ENDED MARCH 31,
			2020			2019
REVENUE:
Research collaboration revenue	$	—		$	2,500
Total revenue	—			2,500
OPERATING EXPENSES:
Research and development	(8,527)			(4,867)
General and administrative	(1,977)			(491)
Total operating expenses	(10,504)			(5,358)
LOSS FROM OPERATIONS	(10,504)			(2,858)
OTHER EXPENSE, NET:
Interest expense, net	(2)			(2)
Research and development incentive income	—			180
Change in fair value of preferred stock tranche obligation	(1,490)			(604)
Other (expense) income, net	(68)			101
Total other expense, net	(1,560)			(325)
Loss before income taxes	(12,064)			(3,183)
Income tax benefit	172			—
Net loss	$	(11,892)		$	(3,183)
Net loss attributable to common stockholders—basic and diluted (Note 10)	$	(12,698)		$	(3,633)
Net loss per share attributable to common stockholders—basic and diluted	$	(5.11)		$	(1.61)
Weighted-average common stock outstanding—basic and diluted	2,484,057			2,258,335

See notes to condensed consolidated financial statements.

KEROS THERAPEUTICS, INC.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(In thousands, except share and per share data)

(Unaudited)



	CONVERTIBLE PREFERRED STOCK																					COMMON STOCK $0.0001 PAR VALUE	ADDITIONAL PAID-IN CAPITAL	ACCUMULATED DEFICIT	TOTAL STOCKHOLDERS' DEFICIT
	$0.0001 PAR VALUE SERIES A				$0.0001 PAR VALUE SERIES A-1					$0.0001 PAR VALUE SERIES B-1				$0.0001 PAR VALUE SERIES C
	SHARES	AMOUNT		SHARES	AMOUNT		SHARES	AMOUNT		SHARES	AMOUNT		SHARES	AMOUNT
As of December 31, 2019	4,607,652	$	9,891	368,612	$	944	1,579,043	$	9,106	—	$	—	2,429,705	$	1	$	203	$	(19,650)	$	(19,446)
Exercise of common stock options	—	—		—	—		—	—		—	—		44,686	—		13		—		13
Issuance of Series C convertible
preferred stock, net of issuance costs of $219	—	—		—	—		—	—		4,169,822	55,781		—	—		—		—		—
Vesting of restricted stock	—	—		—	—		—	—		—	—		17,279	—		—		—		—
Stock-based compensation	—	—		—	—		—	—		—	—		—	—		12		—		12
Settlement of preferred stock tranche liability	—	—		—	—		—	—		—	—		—	—		6,446		—		6,446
Net loss	—	—		—	—		—	—		—	—		—	—		—		(11,892)		(11,892)
As of March 31, 2020	4,607,652	$	9,891	368,612	$	944	1,579,043	$	9,106	4,169,822	$	55,781	2,491,670	$	1	$	6,674	$	(31,542)	$	(24,867)

	CONVERTIBLE PREFERRED STOCK																					COMMON STOCK $0.0001 PAR VALUE	ADDITIONAL PAID-IN CAPITAL	ACCUMULATED DEFICIT	TOTAL STOCKHOLDERS' DEFICIT
	$0.0001 PAR VALUE SERIES A				$0.0001 PAR VALUE SERIES A-1					$0.0001 PAR VALUE SERIES B-1				$0.0001 PAR VALUE SERIES C
	SHARES	AMOUNT		SHARES	AMOUNT		SHARES	AMOUNT		SHARES	AMOUNT		SHARES	AMOUNT
As of December 31, 2018	4,607,652	$	9,891	368,612	$	944	1,579,043	$	9,106	—	$	—	2,243,648	$	1	$	130	$	(7,314)	$	(7,183)
Vesting of restricted stock	—	—		—	—		—	—		—	—		25,918	—		—		—		—
Stock-based compensation	—	—		—	—		—	—		—	—		—	—		11		—		11
Net loss	—	—		—	—		—	—		—	—		—	—		—		(3,183)		(3,183)
As of March 31, 2019	4,607,652	$	9,891	368,612	$	944	1,579,043	$	9,106	—	$	—	2,269,566	$	1	$	141	$	(10,497)	$	(10,355)

See notes to condensed consolidated financial statements.

KEROS THERAPEUTICS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	THREE MONTHS ENDED MARCH 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,892)	$	(3,183)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense	63		45
Stock-based compensation expense	12		11
Non-cash lease expense	89		49
Changes in fair value of preferred stock tranche obligation	1,490		604
Changes in operating assets and liabilities:
Research and development incentive receivable	117		(182)
Prepaid expenses and other current assets	(816)		1,715
Deferred IPO costs	(156)		—
Accounts payable	(193)		813
Operating lease liabilities	(90)		(50)
Deferred revenue	—		(2,500)
Accrued expenses and other current liabilities	3,271		177
Other liabilities	(15)		(12)
Net cash used in operating activities	(8,120)		(2,513)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(176)		—
Net cash used in investing activities	(176)		—
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series C preferred stock	56,000		—
Payment of issuance costs	(219)		—
Proceeds from exercise of stock options	13		—
Net cash provided by financing activities	55,794		—

NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	47,498		(2,513)
Cash, cash equivalents and restricted cash at beginning of period	7,135		23,390
Cash, cash equivalents and restricted cash at end of period	$	54,633	$	20,877

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Deferred IPO costs in accounts payable and accrued expenses	$	1,259	$	—
Settlement of preferred stock tranche obligation	$	6,446	$	—

The following table provides a reconciliation of the cash, cash equivalents and restricted cash as of each of the periods shown above:


	THREE MONTHS ENDED MARCH 31,
	2020		2019
Cash and cash equivalents	$	54,518	$	20,746
Restricted cash	115		131
Total cash, cash equivalents and restricted cash	$	54,633	$	20,877

See notes to condensed consolidated financial statements.

KEROS THERAPEUTICS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Keros Therapeutics, Inc. (“Keros” or the “Company”) was incorporated in 2015 as a Delaware corporation. Its principal offices are in Lexington, Massachusetts. The Company is a clinical-stage biopharmaceutical company focused on the discovery, development and commercialization of novel treatments for patients suffering from hematological and musculoskeletal disorders with high unmet medical need.

The accompanying unaudited interim condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly owned Australian subsidiary, Keros Therapeutics Australia Pty Ltd (“Keros Australia”). All significant intercompany transactions and accounts have been eliminated in consolidation.

Since its inception in 2015, the Company has devoted the majority of its resources on business planning, research and development of its product candidates, including by conducting clinical trials and preclinical studies, raising capital and recruiting management and technical staff to support these operations. To date, the Company has not generated any revenue from product sales as none of its product candidates have been approved for commercialization.

As of March 31, 2020, the Company has funded its operations primarily with proceeds from the sale of convertible preferred stock (see Note 6) and its research collaboration and exclusive license agreement with Novo Nordisk A/S. On April 13, 2020, the Company completed an initial public offering (“IPO”) in which the Company issued and sold 6,900,000 shares of its common stock, which includes 900,000 shares issued and sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a public offering price of $16.00 per share, for aggregate gross proceeds of $110.4 million. The Company received approximately $99.8 million in net proceeds after deducting underwriting discounts and commissions and offering costs.

In connection with the IPO, the Company's board of directors (the "Board") and stockholders approved an amended and restated certificate of incorporation to, among other things, effect a one-for-2.1703 reverse stock split of its issued and outstanding shares of common stock and convertible preferred stock, as well as to effect a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock. The reverse stock split was effected on March 31, 2020. Accordingly, all share and per share amounts of common stock for all periods presented in the accompanying unaudited interim condensed consolidated financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect this reverse stock split and adjustment of preferred stock conversion ratios.

Upon the closing of the IPO, all of the then-outstanding shares of convertible preferred stock automatically converted into 10,725,129 shares of common stock at the applicable conversion ratio then in effect. Subsequent to the closing of the IPO, there were no shares of convertible preferred stock outstanding. The unaudited interim condensed consolidated financial statements as of March 31, 2020, including share and per share amounts, do not give effect to the IPO, as it closed subsequent to March 31, 2020.

The Company’s condensed consolidated financial statements have been prepared on the basis of the Company continuing as a going concern for the next 12 months. Management believes that the Company’s existing cash and cash equivalents, together with the net proceeds from the IPO, will allow the Company to continue its operations for at least the next 12 months. In the absence of a significant source of recurring revenue, the continued viability of the Company beyond that point is dependent on its ability to continue to raise additional capital to finance its operations. If the Company is unable to obtain additional funding, the Company may be forced to delay, reduce or eliminate some or all of its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

The accompanying unaudited interim condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 have been prepared by the Company in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and, pursuant to the rules and regulations of Article 10 of Regulation S-X of the Securities Act published by the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally

included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes the disclosures are adequate. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2019 included in the Company’s final prospectus that forms part of the Company’s Registration Statement on Form S-1 (Reg. No. 333-237212), filed with the SEC pursuant to Rule 424(b)(4) on April 8, 2020 (the “Prospectus”).

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited financial statements. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments which are necessary for a fair presentation of the Company’s condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 and condensed consolidated cash flows for the three months ended March 31, 2020 and 2019. Such adjustments are of a normal and recurring nature. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited interim condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2019, and the notes thereto, which are included in the Company’s Prospectus. Except as detailed below, there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2020.

Risks and Uncertainties

With the global spread of the ongoing COVID-19 pandemic in the first quarter of 2020, the Company’s management team has met frequently to discuss the implementation of business continuity plans to address and mitigate the impact of the COVID-19 pandemic on its business. Additionally, in response to the spread of COVID-19, the Company closed its principal executive office in March 2020, with its administrative employees continuing their work outside of the office, and limited the number of staff in any given research laboratory. The Company anticipates that the COVID-19 pandemic will have an impact on the clinical development timelines for several of its clinical programs. The extent to which the COVID-19 pandemic impacts the Company’s business, its clinical development and regulatory efforts, its corporate development objectives and the value of and market for its common stock will depend on future developments which are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the United States, Australia and other countries and the effectiveness of actions taken globally to contain and treat the disease. The global economic slowdown, the overall disruption of global healthcare systems and the other risks and uncertainties associated with the pandemic could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects. As of the date of issuance of these financial statements, the Company is not aware of any specific event or circumstance that would require the Company to update its estimates, assumptions and judgments or revise the carrying value of its assets or liabilities. Actual results could differ from those estimates, and any such differences may be material to the Company’s financial statements.

In addition, the Company is subject to other challenges and risks specific to its business and its ability to execute on its business plan and strategy, as well as risks and uncertainties common to companies in the biopharmaceutical industry with research and development operations, including, without limitation, risks and uncertainties associated with: obtaining regulatory approval of its product candidates; delays or problems in obtaining clinical supply, loss of single source suppliers or failure to comply with manufacturing regulations; product development and the inherent uncertainty of clinical success; the challenges of protecting and enhancing its intellectual property rights; the challenges of complying with applicable regulatory requirements; and identifying, acquiring or in-licensing additional products or product candidates. In addition, to the extent the ongoing COVID-19 pandemic adversely affects the Company’s business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties discussed above.

Deferred Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded in stockholders’ deficit as a reduction of proceeds generated as a result of the offering. Should a planned equity financing be abandoned, the deferred offering costs would be expensed immediately as a charge to operating expenses in the condensed consolidated statement of operations. The Company recorded deferred offering costs, related to the IPO, of approximately $2.0 million as of March 31, 2020. Upon closing the IPO in April 2020, deferred offering costs were derecognized and recorded against the IPO proceeds as a debit to additional paid-in capital.

Recently Issued Accounting Pronouncements

The new accounting pronouncements recently adopted by the Company and issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company are described in the Company’s audited financial statements as of and for the year ended December 31, 2019, and the notes thereto, which are included in the Company’s Prospectus filed with the SEC on April 8, 2020. There have been no new accounting pronouncements issued in the three months ended March 31, 2020 that are applicable to the Company.

3. FAIR VALUE MEASUREMENTS

The following table presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy utilized to determine such fair values (in thousands):


DESCRIPTION	MARCH 31, 2020		QUOTED PRICES ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 3)
Asset
Money market funds	$	50,543	$	50,543	$	—	$	—
Total financial assets	$	50,543	$	50,543	$	—	$	—


DESCRIPTION	DECEMBER 31, 2019		QUOTED PRICES ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2)		SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 3)
Asset
Money market funds	$	4,972	$	4,972	$	—	$	—
Total financial assets	$	4,972	$	4,972	$	—	$	—
Liability
Preferred stock tranche obligation	$	(4,956)	$	—	$	—	$	(4,956)
Total financial liabilities	$	(4,956)	$	—	$	—	$	(4,956)

There have been no transfers between fair value levels during the three months ended March 31, 2020. The Company’s Preferred Stock Tranche Obligation (defined below) is carried at fair value determined according to Level 3 inputs in the fair value hierarchy as described below. The carrying values of other current assets, accounts payable and accrued expenses approximate their fair values due to the short-term nature of these assets and liabilities.

Preferred Stock Tranche Obligation

The Company determined that its obligation to issue, and the Company’s investors’ obligation to purchase additional shares of convertible preferred stock at a fixed price (i.e. the issuance price) in subsequent tranches

following the initial closings of the series A, series A-1, and series B-1 convertible preferred stock (respectively, the “Series A Preferred Stock,” “Series A-1 Preferred Stock,” and “Series B-1 Preferred Stock”, which are referred to collectively with the series B-2 convertible preferred stock (the “Series B-2 Preferred Stock”) and the series C convertible preferred stock (the “Series C Preferred Stock”) as the “Preferred Stock”) financings represented a freestanding financial instrument (the “Preferred Stock Tranche Obligation”). The freestanding financial instrument was classified as a liability on the Company’s condensed consolidated balance sheets and initially recorded at fair value, with changes in fair value for each reporting period recognized in other expense, net in the condensed consolidated statement of operations.

The Board determined it was probable that the milestone would be met, and then the stockholders and the Board subsequently waived the Series B-2 Preferred Stock milestone and the issuance of the Series B-2 Preferred Stock on March 2, 2020. Instead of issuing the Series B-2 Preferred Stock upon this waiver, the Company instead closed its convertible Series C Preferred Stock financing (“Series C financing”). The associated Preferred Stock Tranche Obligation was remeasured prior to settlement, with the associated $1.5 million increase in fair value recorded in the Company’s condensed consolidated statement of operations as other expense, net. As the Series C financing was executed with related parties, the Company recognized the settlement of the Preferred Stock Tranche Obligation of $6.4 million as a capital contribution in additional paid-in capital in the Company’s condensed consolidated balance sheets.

The following reflects the significant quantitative inputs used in the valuation of the Preferred Stock Tranche Obligation:


	MARCH 2, 2020			DECEMBER 31, 2019
Stand-alone Series B-1 Preferred Stock price (spot price)	$	3.3557		$	3.3557
Estimated future value of Series B-2 Preferred Stock	$	3.7546		$	3.7546
Discount rate	15.50		%	15.50		%
Time to liquidity (years)	0.00			0.16
Probability of tranche closing	100		%	80		%

A change in the assumptions related to the valuation of the Preferred Stock Tranche Obligation could have a significant impact on the value of the obligation. The purchase price of the Preferred Stock at initial issuance, and all subsequent issuances was higher than the fair value of the Company’s common stock.

The following table sets forth a summary of changes in the fair value and settlement of the Company’s Preferred Stock Tranche Obligation for which fair value is determined by Level 3 inputs (in thousands):


	PREFERRED STOCK TRANCHE OBLIGATION
Balance as of January 1, 2019	$	2,392
Change in fair value	2,564
Balance as of December 31, 2019	4,956
Change in fair value	1,490
Settlement of tranche obligation	(6,446)
Balance as of March 31, 2020	$	—

Fluctuations in the fair value of the Company’s Preferred Stock is the primary cause for the significant changes in fair value of the Preferred Stock Tranche Obligation. In 2020 and 2019, the enterprise value of the Company was determined using the Market Approach, specifically the Subject Company Transaction Method, which considers all share class rights and preferences, as of the date of the most recent financing. As part of the Company’s strategy, during 2019, the Company began considering the pursuit of longer-term liquidity options including a potential initial public offering, which caused an increase in the value of the Series B-1 Preferred Stock while reducing the value of the Preferred Stock Tranche Obligation.

Subsequently, in March 2020, the Company determined it was probable that the milestone criteria necessary to close the subsequent tranche would be met; as such, the value of the Preferred Stock Tranche Obligation increased. The Board then waived the milestone in favor of issuing the Series C Preferred Stock in March 2020

(see Note 6), and in doing so the Preferred Stock Tranche Obligation was fully settled and reduced to $0 on the Company's condensed consolidated balance sheet.

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following (in thousands):


	MARCH 31, 2020		DECEMBER 31, 2019
Prepaid service contracts	$	459	$	21
Income tax credit receivable	172		—
Prepaid sales tax	135		65
Prepaid rent	—		64
R&D payroll tax credit	96		—
Other	335		231
Total prepaid expenses and other current assets	$	1,197	$	381

5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following (in thousands):


	MARCH 31, 2020		DECEMBER 31, 2019
Accrued external R&D costs	$	1,336	$	645
Accrued external manufacturing costs	2,987		282
Accrued compensation and benefits	396		749
Accrued tax	43		43
Accrued professional fees	1,034		34
Other	226		269
Total accrued expenses and other current liabilities	$	6,022	$	2,022

Accrued compensation and benefits consisted primarily of accrued payroll and accrued vacation.

6. CONVERTIBLE PREFERRED STOCK

On March 2, 2020, the Company authorized the sale and issuance of up to 9,049,783 shares of Series C Preferred Stock, par value $0.0001 per share, of which 4,169,822 shares were sold at a purchase price of $13.43 per share for gross proceeds of $56.0 million. Issuance costs were approximately $0.2 million. As part of the Company's Series C Preferred Stock issuance, 3,078,968 of the shares were issued to affiliates of members of the Board including entities affiliated with OrbiMed, entities affiliated with Pontifax, Arkin Bio Ventures Limited Partnership, entities affiliated with Partners Innovation Fund and Jasbir Seehra, Ph. D,. All issued shares reflect the reverse stock split effected March 31, 2020 while the Board authorized shares reflect the original number of shares authorized pre-split.

As of March 31, 2020 and December 31, 2019, Preferred Stock consisted of the following (in thousands, except share data):


	MARCH 31, 2020
	PREFERRED STOCK AUTHORIZED	PREFERRED STOCK ISSUED AND OUTSTANDING	CARRYING VALUE		LIQUIDATION VALUE		COMMON STOCK ISSUABLE UPON CONVERSION
Series A Preferred Stock	10,000,000	4,607,652	$	9,891	$	12,471	4,607,652
Series A-1 Preferred Stock	800,000	368,612	944		1,191		368,612
Series B-1 Preferred Stock	3,427,004	1,579,043	9,106		12,826		1,579,043
Series B-2 Preferred Stock	3,062,891	—	—		—		—
Series C Preferred Stock	9,049,783	4,169,822	55,781		56,356		4,169,822
	26,339,678	10,725,129	$	75,722	$	82,844	10,725,129


	DECEMBER 31, 2019
	PREFERRED STOCK AUTHORIZED	PREFERRED STOCK ISSUED AND OUTSTANDING	CARRYING VALUE		LIQUIDATION VALUE		COMMON STOCK ISSUABLE UPON CONVERSION
Series A Preferred Stock	10,000,000	4,607,652	$	9,891	$	12,271	4,607,652
Series A-1 Preferred Stock	800,000	368,612	944		1,171		368,612
Series B-1 Preferred Stock	3,427,004	1,579,043	9,106		12,596		1,579,043
Series B-2 Preferred Stock	3,062,891	—	—		—		—
	17,289,895	6,555,307	$	19,941	$	26,038	6,555,307

The following is a summary of the rights and privileges of the Preferred Stockholders as of March 31, 2020.

Conversion: Shares of Preferred Stock are convertible, at the option of the holder, at any time, into shares of common stock. The number of shares is determined by dividing the original issuance price by the conversion price. As such, the shares of Preferred Stock effectively convert on a one-for-one basis. These rights terminate in the event of a liquidation or winding up of the Company. No fractional shares will be issued.

Liquidation Preference: While the Preferred Stock is not redeemable, the shares are redeemable for cash in certain change of control events that are beyond the control of the Company. In the event of any liquidation or Deemed Liquidation Event (as defined in the Company’s articles of incorporation), the Preferred Stockholders are entitled to the greater of (i) the original issue price of the Preferred Stock plus any accrued dividends not yet paid plus any other dividends declared and unpaid or ii) the amount payable had all classes of shares been converted to common stock. In the event of a Deemed Liquidation Event, if the assets of the Company available for distribution are insufficient to pay the Preferred Stockholders in the full amount to which they are entitled, the Preferred Stockholders shall share ratably in any distribution of the assets available for distribution in proportion to the number of shares of Preferred Stock that they hold. Note that in relation to the above, the holders of Series C Preferred Stock are entitled to be paid out prior to the holders of common stock, Series A Preferred Stock, Series A-1 Preferred Stock and Series B-1 Preferred Stock.

Dividends: Dividends accrue at a rate of $0.17, $0.22, $0.58263 and $1.07439 per share, per year on the anniversary of the issuance date for Series A Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C Preferred Stock, respectively. Dividends are cumulative; however, accrued dividends will be payable only if and when declared by the Board. Dividends on other classes of the Company’s stock may not be declared or paid unless the Preferred Stockholders are first paid (i) all dividends accrued and not yet paid plus (ii) the product of (a) dividends declared on an as converted basis and (b) Preferred Stock on an as converted basis. That is, if the Company declared dividends on outstanding common stock, Preferred Stockholders would receive both the dividends owed for the Preferred Stock plus that which would be owed if the Preferred Stock were converted to common stock. No dividends have been declared through March 31, 2020.

Voting Rights: Each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Preferred Stockholders and common stockholders vote together as a single class.

7. COMMON STOCK

As of March 31, 2020, the Company’s certificate of incorporation authorized the Company to issue 35,000,000 shares of common stock, par value $0.0001 per share. The voting, dividend and liquidation rights of the holders of

the Company’s common stock are subject to and qualified by the rights, powers and preference of the holders of the Preferred Stock set forth above.

Each share of common stock entitles the holder to one vote, together with the holders of Preferred Stock, on all matters submitted to the stockholders for a vote. As of March 31, 2020, no cash dividends have been declared or paid.

As of March 31, 2020 and December 31, 2019, the Company has reserved the following shares of common stock for potential conversion of outstanding Preferred Stock, the vesting of restricted stock and exercise of stock options:


	MARCH 31, 2020	DECEMBER 31, 2019
Preferred Stock	10,725,129	6,555,307
Unvested restricted stock	17,278	34,557
Options to purchase common stock	1,116,301	1,164,017
Total	11,858,708	7,753,881

8. STOCK-BASED COMPENSATION

On March 2, 2020, the 2017 Stock Incentive Plan, as amended (the “2017 Plan”), was further amended to increase the number of shares of common stock reserved and available to be issued by 921,531 shares. As of March 31, 2020, there were an aggregate of 1,116,301 shares of common stock issuable upon the exercise of outstanding options under the 2017 Plan and an aggregate of 988,649 shares reserved for future issuance under the 2017 Plan.

A summary of option activity under the 2017 Plan during the three months ended March 31, 2020 is as follows (in thousands except share and per share data):


	NUMBER OF OPTIONS	WEIGHTED-AVERAGE EXERCISE PRICE		WEIGHTED-AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE
Outstanding as of December 31, 2019	1,164,017	$	0.35	8.64	$	144
Granted	—
Exercised	(44,686)	0.28			$	321
Expired	(3,030)	0.16
Outstanding as of March 31, 2020	1,116,301	$	0.36	8.44	$	7,935

Options exercisable as of December 31, 2019	608,156	$	0.29	8.17	$	112
Options exercisable as of March 31, 2020	602,434	$	0.30	7.98	$	4,319

There were no options granted in the three months ended March 31, 2020. As of March 31, 2020 and 2019, respectively, there was $