Summary of significant accounting policies |
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Summary of significant accounting policies | ||||||||||||||||||||||||||||||||||||||
Summary of significant accounting policies | 2. Summary of significant accounting policies Basis of presentation The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted (“GAAP”) in the United States. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) promulgated by the Financial Accounting Standards Board (“FASB”). Unaudited interim results These unaudited condensed financial statements and accompanying notes should be read in conjunction with the Company’s annual financial statements and the notes thereto included in the Company’s IPO prospectus filed with the Securities and Exchange Commission on October 5, 2020. The accompanying condensed financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 are unaudited but include all adjustments that management believes to be necessary for a fair presentation of the periods presented. Interim results are not necessarily indicative of results for a full year. Balance sheet amounts as of December 31, 2019 have been derived from the audited financial statements as of that date. Reverse stock split The Company’s board of directors approved a one-for-six reverse stock split of its issued and outstanding common stock, stock options, convertible preferred stock and convertible preferred stock warrants legally effective as of September 22, 2020. Accordingly, all convertible preferred shares and common stock shares, per share amounts, and additional paid-in capital amounts for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the reverse stock split. 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 expenses. The Company bases its estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, the fair value of the Company’s common stock in connection with share-based compensation arrangements and the fair value of the Company’s liability-classified warrants. Actual results could differ from these estimates. Fair value of financial instruments ASC Topic 820, Fair Value Measurement (ASC 820), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the assets or liability and are developed based on the best information available in the circumstances. ASC 820 identifies fair value 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 a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tiered value hierarchy that distinguishes between the following: Level 1 — Quoted market prices in active markets for identical assets or liabilities. Level 2 — Inputs other than Level 1 inputs that are either directly or indirectly observable, such as quoted market prices, interest rates and yield curves. Level 3 — Unobservable inputs for the asset or liability (i.e. supported by little or no market activity). Level 3 inputs include management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk). To the extent the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair values requires more judgement. Accordingly, the degree of judgement exercised by the Company in determining fair value is greatest for instruments categorized as Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Government contract funding The Company accounts for amounts received under its U.S. Department of Defense expense reimbursement contract as contra-research and development expenses in the condensed statements of operations. Warrant liability The Company issued warrants to purchase shares of Series A convertible preferred stock in connection with the June 2020 Series A convertible preferred stock sale. The warrants were classified as a liability on the condensed balance sheet at September 30, 2020 as the underlying Series A convertible preferred stock is contingently redeemable and outside of the Company’s control (see Note 11, Warrants to acquire shares of Series A convertible preferred stock). The fair value of the warrants on the date of issuance was recorded as a reduction of the carrying value of the Series A convertible preferred stock and as a long-term liability in the condensed balance sheet. The warrants will be subsequently remeasured to fair value at each balance sheet date. Changes in the fair value of the warrants are recognized as other income or expense in the statements of operations. The change in fair value of the warrants during the three and nine months ended September 30, 2020 was $5.5 million. The Company used the Black Scholes option pricing model, which incorporated assumptions and estimates, to value the Series A convertible preferred stock warrants. Estimates and assumptions impacting the fair value measurement of the warrants included the fair value per share of the underlying Series A convertible preferred stock, the remaining contractual term of the warrants, risk-free interest rate, expected dividend yield and expected volatility of the price of the underlying Series A convertible preferred stock. The Company historically determined the fair value per share of the underlying Series A convertible preferred stock by taking into consideration the most recent sales of its Series A convertible preferred stock, results obtained from third party valuations and additional factors that were deemed relevant. As of September 30, 2020, the Company utilized the $12.00 per share IPO price to value the Series A convertible preferred stock warrants. The Company historically had been a private company and lacked company specific historical and implied volatility information of its stock. Therefore, it estimated the expected stock volatility based on the historical volatility of publicly traded peer companies for a term equal to the remaining contractual term of the warrants at the time. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining contractual term of the warrants. Expected dividend yield was determined based on the fact that the Company had never paid cash dividends and did not expect to pay any cash dividends in the foreseeable future. Research and development costs Research and development costs are charged to expense as incurred. Research and development costs consist of costs incurred in performing research and development activities, including salaries and bonuses, share-based compensation, employee benefits, facilities costs, laboratory supplies, depreciation and amortization, preclinical expenses, consulting and other contracted services. Additionally, under the terms of the license agreements to which the Company is a party, the Company is obligated to make future payments should certain development and regulatory milestones be achieved. No such costs have been incurred for the three or nine months ended September 30, 2020 and 2019. Costs for certain research and development activities are recognized based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the condensed financial statements as a prepaid or accrued expense. Net loss per share 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 stock 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 of common stock is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share of common stock is computed by adjusting net loss to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted net loss per share of common stock is computed by dividing the diluted net loss by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of common stock equivalents. The following potentially dilutive securities outstanding as of September 30, 2020 and 2019 have been excluded from the computation of diluted weighted-average shares of common stock outstanding, as they would be anti-dilutive:
The Company’s Series A convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocated to participating securities. In periods in which the Company reports a net loss per share of common stock, diluted net loss per share of common stock is the same as basic net loss per share of common stock since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss per share of common stock for the three and nine months ended September 30, 2020 and 2019. Segment and geographic information Operating segments are defined as components of an entity about which separate discrete information is available for evaluation by the chief operating decision maker (“CODM”), or decision-making group, in deciding how to allocate resources and in assessing performance. The CODM is the Company’s Chief Executive Officer. The Company views its operations as and manages its business in one operating segment operating exclusively in the United States. |