SEC Filing | Longboard Pharmaceuticals

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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 March 31, 2021


☐	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: 001-40192

Longboard Pharmaceuticals, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	84-5009619
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
6154 Nancy Ridge Drive San Diego, CA	92121
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (619) 592-9775

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

LBPH

The Nasdaq Global 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 May 5, 2021, the registrant had 17,215,350 shares of common stock, $0.0001 par value per share, outstanding, comprised of 13,585,950 shares of voting common stock, $0.0001 par value per share and 3,629,400 shares of non-voting common stock, $0.0001 par value per share.

Table of Contents


		Page
	SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS	1
	SUMMARY RISK FACTORS	2

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Balance Sheets	3
	Condensed Statements of Operations and Comprehensive Loss	4
	Condensed Statements of Cash Flows	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION	24
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	73
Item 6.	Exhibits	74
Signatures		75

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:


	•		our plans to research, develop and commercialize our product candidates;

	•		the initiation, progress, success, cost and timing of our clinical trials and product development activities;

	•		the therapeutic potential of our product candidates, and the disease indications for which we intend to develop our product candidates;

	•		our ability and timing to advance our product candidates into, and to successfully initiate, conduct, enroll and complete, clinical trials;

	•		our ability to manufacture our product candidates for clinical development and, if approved, for commercialization, and the timing and costs of such manufacture;

	•		the performance of third parties in connection with the development and manufacture of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers;

	•		our ability to obtain funding for our operations, including funding necessary to initiate and complete clinical trials of our product candidates;

	•		the size and growth of the potential markets for our product candidates and our ability to serve those markets;

	•		the potential scope, duration and value of our intellectual property rights;

	•		our ability, and the ability of our licensors, to obtain, maintain, defend and enforce intellectual property rights protecting our product candidates, and our ability to develop and commercialize our product candidates without infringing the proprietary rights of third parties;

	•		our ability to recruit and retain key personnel;

	•		the effects of the COVID-19 pandemic on our operations; and

	•		other risks and uncertainties, including those described under Part II, Item 1A, “Risk Factors” of this Quarterly Report.

Any forward-looking statements in this Quarterly Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A, “Risk Factors” of this Quarterly Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Unless the context otherwise indicates, references in this Quarterly Report to the terms, "Longboard", "the Company", "we", "our", and "us" refer to Longboard Pharmaceuticals, Inc. and references to our "common stock" refers to our voting common stock.

SUMMARY OF RISKS ASSOCIATED WITH OUR BUSINESS

An investment in shares of our common stock involves a high degree of risk. Below is a list of the more significant risks associated with our business. This summary does not address all of the risks that we face. Additional discussion of the risks listed in this summary, as well as other risks that we face, are set forth under Part I, Item 1A, “Risk Factors” in this Quarterly Report. Some of the material risks associated with our business include the following:


	•		We have a very limited operating history, and we have incurred losses since our inception and anticipate that we will continue to incur significant losses for the foreseeable future. We may never generate any revenue or become profitable or, if we achieve profitability, we may not be able to sustain it.

	•		We will need substantial additional capital to finance our operations, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our product development efforts or other operations.

	•		We are early in our development efforts and have only one product candidate, LP352, in early clinical development. All of our other product candidates are in the preclinical stage. If we are unable to advance our product candidates in clinical development, obtain regulatory approval and ultimately commercialize our product candidates, or experience significant delays in doing so, our business will be materially harmed.

	•		Clinical and preclinical drug development involves a lengthy and expensive process with an uncertain outcome. The results of prior clinical trials and early preclinical studies and clinical trials of our product candidates are not necessarily predictive of future results.

	•		The regulatory approval processes of the U.S. Food and Drug Administration ("FDA") and comparable foreign authorities are lengthy, time consuming and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business will be substantially harmed.

	•		Because we have multiple product candidates in our clinical pipeline and are considering a variety of target indications, we may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

	•		If the market opportunities for our product candidates are smaller than we estimate, even assuming approval of a product candidate, our business may suffer. Because the patient populations in the market for our product candidates may be small, we must be able to successfully identify patients and acquire a significant market share to achieve profitability and growth.

	•		We currently have no marketing and sales organization and have no experience as a company in commercializing products, and we may have to invest significant resources to develop these capabilities. If we are unable to establish marketing and sales capabilities or enter into agreements with third parties to market and sell our products, we may not be able to generate product revenue.

	•		COVID-19 has impacted and could continue to adversely impact our business.

	•		Arena Pharmaceuticals, Inc. ("Arena") currently performs or supports many of our operating activities pursuant to a services agreement, and if we are unable to replicate or replace these functions if this services agreement is terminated, our operations could be adversely affected.

	•		We intend to rely on third parties to conduct, supervise and monitor our preclinical studies and clinical trials, and if those third parties perform in an unsatisfactory manner, it may harm our business.

	•		Our principal stockholders and management own a significant percentage of our stock and are able to exert significant control over matters subject to stockholder approval.

	•		We depend on intellectual property licensed from Arena, the termination of which could result in the loss of significant rights, which would harm our business.

	•		If we are unable to obtain and maintain patent protection for our current or any future product candidates, or if the scope of the patent protection obtained is not sufficiently broad, we may not be able to compete effectively in our markets.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Longboard Pharmaceuticals, Inc.

Condensed Balance Sheets

(unaudited)


	March 31,			December 31,
(in thousands, except share and per share data)	2021			2020
ASSETS
Current assets:
Cash and cash equivalents	$	120,851		$	55,316
Prepaid expenses and other current assets		2,779			46
Total current assets		123,630			55,362
Deferred financing costs		—			876
Total assets	$	123,630		$	56,238
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	2,019		$	1,213
Accrued research and development expenses		1,051			916
Accrued other expenses		699			845
Accrued compensation and related expenses		275			161
Total current liabilities		4,044			3,135
Commitments and contingencies (see Note 8)
Convertible preferred stock:
Series A convertible preferred stock $0.0001 par value; authorized shares - none and 5,600,000 at March 31, 2021 and December 31, 2020, respectively; issued and outstanding shares - none and 5,600,000 at March 31, 2021 and December 31, 2020, respectively; aggregate liquidation preference – none and $56,000 at March 31, 2021 and December 31, 2020, respectively		—			55,795
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value; authorized shares - 10,000,000 and none at March 31, 2021 and December 31, 2020, respectively; issued and outstanding shares - none at March 31, 2021 and December 31, 2020		—			—
Voting common stock, $0.0001 par value; authorized shares - 300,000,000 and 10,500,000 at March 31, 2021 and December 31, 2020, respectively; issued and outstanding shares - 12,939,140 and 3,840,540 at March 31, 2021 and December 31, 2020, respectively, both excluding 348,450 shares subject to repurchase		1			—
Non-voting common stock, $0.0001 par value; authorized shares - 10,000,000 and none at March 31, 2021 and December 31, 2020, respectively; issued and outstanding shares - 3,629,400 and none at March 31, 2021 and December 31, 2020, respectively		—			—
Additional paid-in capital		139,684			11,708
Accumulated deficit		(20,099	)		(14,400	)
Total stockholders' equity (deficit)		119,586			(2,692	)
Total liabilities, convertible preferred stock and stockholders' equity (deficit)	$	123,630		$	56,238

The accompanying notes are an integral part of these financial statements.

Longboard Pharmaceuticals, Inc.

Condensed Statements of Operations and Comprehensive Loss

(unaudited)



(in thousands, except share and per share data)	Three Months Ended March 31, 2021			Period from January 3, 2020 (Inception) through March 31, 2020
Operating expenses:
Research and development		4,398			59
General and administrative		1,305			115
Total operating expenses		5,703			174
Loss from operations		(5,703	)		(174	)
Interest income		4			—
Net loss and comprehensive loss	$	(5,699	)	$	(174	)

Net loss per share, basic and diluted	$	(0.84	)	$	(0.05	)

Weighted-average shares outstanding, basic and diluted		6,810,407			3,711,084

The accompanying notes are an integral part of these financial statements.

Longboard Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(unaudited)



(in thousands)	Three Months Ended March 31, 2021			Period from January 3, 2020 (Inception) through March 31, 2020
Cash flows from operating activities:
Net loss	$	(5,699	)	$	(174	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		333			95
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(2,733	)		(1	)
Accounts payable		275			—
Accrued research and development expenses		135			27
Accrued other expenses		(172	)		5
Accrued compensation and related expenses		115			9
Net cash used in operating activities		(7,746	)		(39	)
Financing activities:
Capital contributions from Arena Pharmaceuticals, Inc.		—			39
Series A convertible preferred stock issuance costs		(1	)		—
Proceeds from initial public offering		80,000			—
Initial public offering costs		(6,718	)		—
Net cash provided by financing activities		73,281			39
Net increase in cash and cash equivalents		65,535			—
Cash and cash equivalents at the beginning of the period		55,316			—
Cash and cash equivalents at the end of the period	$	120,851		$	—

Supplemental disclosure of cash flow information:
Initial public offering costs in accounts payable	$	531		$	—
Initial public offering costs in accrued other expenses	$	664		$	—

The accompanying notes are an integral part of these financial statements.

Longboard Pharmaceuticals, Inc.

Notes to Unaudited Financial Statements

Note 1. Organization and Basis of Presentation

Description of Business

Longboard Pharmaceuticals, Inc. (the "Company"), formerly Arena Neuroscience, Inc., was incorporated in the state of Delaware on January 3, 2020 and is based in San Diego, California. The Company was organized and initially wholly-owned by Arena Pharmaceuticals, Inc. ("Arena"), until the closing of its Series A convertible preferred stock ("Series A Preferred Stock") financing in October 2020. The Company is a clinical stage biopharmaceutical company focused on developing novel, transformative medicines for neurological diseases. The Company’s most advanced product candidate, LP352, is being developed to treat patients with developmental and epileptic encephalopathies and is currently in a Phase 1 clinical trial. The Company’s preclinical product candidates include LP143 and LP659, which are focused on developing therapies for central nervous system neuroinflammatory diseases.

Initial Public Offering

On March 16, 2021, the Company completed the initial public offering (“IPO”) of its common stock. In connection with the IPO, the Company issued and sold 5,298,360 shares of common stock, which included 298,360 shares of its common stock issued pursuant to the option granted to the underwriters to purchase additional shares in April 2021, at a public offering price of $16.00 per share. The Company raised $76.2 million in net proceeds from the IPO after deducting underwriters’ discounts and commissions of $5.9 million and issuance costs of $2.6 million. The net proceeds from the Company’s IPO included $1.2 million in unpaid issuance costs classified in accounts payable and accrued liabilities as of March 31, 2021.

Immediately prior to the closing of the IPO, 2,630,000 shares of Series A Preferred Stock were exchanged for 3,629,400 shares of non-voting common stock and 2,970,000 shares were automatically converted into 4,098,600 shares of voting common stock. Following the IPO, there were no shares of Series A Preferred Stock outstanding.

Forward Stock Splits

On October 27, 2020, the Company filed an amendment to the Company’s certificate of incorporation to effect a forward stock split of shares of the Company’s common stock on a 2,783-for-1 basis (October Forward Stock Split). The par value of the common stock was not adjusted as a result of the October Forward Stock Split. The accompanying financial statements and notes to the financial statements give retroactive effect to the October Forward Stock Split for the periods presented.

On March 5, 2021, the Company filed an amendment to the Company’s amended and restated certificate of incorporation to effect a forward stock split of shares of the Company’s common stock on a 1.38-for-1 basis (March Forward Stock Split). Adjustments corresponding to the March Forward Stock Split were made to the ratio at which the Company’s Series A Preferred Stock were converted into common stock immediately prior to the closing of the IPO. The par value of the common stock and number of shares authorized were not adjusted as a result of the March Forward Stock Split. All references to common stock, options to purchase common stock, share data, per share data, and related information contained in the financial statements and related footnotes have been retrospectively adjusted to reflect the effect of the March Forward Stock Split for all periods presented.

Basis of Presentation

The Company’s condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, the accompanying condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.

The accompanying condensed financial statements and related notes are unaudited. The unaudited condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The condensed balance sheet as of December 31, 2020 has been derived from the audited financial statements at that date but does not include all information and notes required by GAAP for complete financial statements. The operating results presented in these unaudited condensed financial statements are not necessarily indicative of the results that may be expected for any future periods. These condensed financial statements should be read in conjunction with the Company's audited financial statements included in the prospectus dated March 11, 2021 that forms a part of the Company’s registration statement on Form S-1 (File No. 333-253329) as filed with the SEC pursuant to Rule 424(b)(4) promulgated under the Securities Act of 1933, as amended, on March 12, 2021.

In addition, the accompanying condensed financial statements include the financial results from inception (January 3, 2020) through March 31, 2021. The Company’s fiscal year-end is December 31. The Company concluded under the guidance in Accounting Standards Codification 805, Business Combinations that the Company was not required to present historical carve-out financial results for activity occurring at Arena prior to the Company’s formation as the assets licensed to the Company by Arena did not constitute a business. The financial statements include allocations for certain Arena corporate expenses, including costs of information technology, human resources, accounting, legal, facilities, insurance, treasury and other corporate and infrastructure services. These allocations were made on the basis of the actual hours incurred in providing services to the Company by employees of Arena multiplied by a fully burdened average cost per employee. Management believes such allocation of corporate expenses from Arena is reasonable. Effective October 27, 2020, the Company entered into a formal services agreement with Arena for these services (see Note 6). The financial statements may not include all of the expenses that would have been incurred had the Company been a stand-alone company during the period presented and may not reflect the Company’s results of operations, financial position and cash flows had the Company been a stand-alone company during the period presented. The Company also received capital contributions of $3.2 million from Arena to fund start-up activities throughout the period ended December 31, 2020. The capital contributions from Arena have been presented in additional paid-in capital on the balance sheet.

Liquidity and Capital Resources

Since its inception, the Company has devoted substantially all of its resources to organizing and staffing, research and development ("R&D") activities, business planning, raising capital, in-licensing intellectual property rights and establishing its intellectual property portfolio, and providing general and administrative ("G&A") support for these operations and has funded its operations primarily with the net proceeds from the issuance of Series A Preferred Stock and common stock. The Company has incurred losses and negative cash flows from operations since commencement of its operations. The Company had an accumulated deficit of $20.1 million and $14.4 million as of March 31, 2021 and December 31, 2020, respectively.

Management expects the Company will incur substantial operating losses for the foreseeable future in order to complete preclinical studies and clinical trials, seek regulatory approval, and launch and commercialize any product candidates for which it receives regulatory approval. The Company will need to raise additional capital through public or private equity or debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements.

The COVID-19 pandemic continues to rapidly evolve and has already resulted in a significant disruption of global financial markets. The Company’s ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the pandemic. If the disruption persists and deepens, the Company could experience an inability to access additional capital.

As of March 31, 2021, the Company had available cash and cash equivalents of $120.9 million and working capital of $119.6 million to fund future operations. Management believes that its capital resources as of March 31, 2021 will be sufficient to fund the Company’s operations for at least 12 months after the date these unaudited condensed financial statements are issued.

Note 2. Summary of Significant Accounting Policies

Use of Estimates

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of the Company’s financial statements requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Such estimates include the accrual of R&D expenses and stock-based compensation. Management evaluates its estimates on an ongoing basis. Although estimates are based on the Company’s historical experience, knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to significant concentration of credit risk consist solely of cash. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts, and management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

Deferred Financing Costs

Prior to the completion of the IPO, the Company had deferred financing costs consisting of legal, accounting and other fees and costs directly attributable to the IPO. As of December 31, 2020, $0.9 million of deferred financing costs were recorded on the balance sheet. Upon the completion of the IPO, all deferred financing costs were reclassified to additional paid-in capital.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments and foreign currency gains and losses. Net loss and comprehensive loss were the same for the periods presented.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents include cash in readily available checking accounts, money market funds, corporate debt securities, and obligations of U.S. Government-sponsored enterprises. The carrying amounts reported in the unaudited condensed balance sheets for cash and cash equivalents are valued at cost, which approximates fair value.

R&D Expenses

R&D expenses are expensed in the periods in which they are incurred. External expenses consist primarily of payments to Arena, outside consultants and contract research organizations in connection with the Company’s discovery, preclinical and clinical activities, process development, manufacturing activities, regulatory and other services. Certain R&D external expenses are recognized based on an evaluation of the progress to completion of specific tasks using information provided to the Company by its service providers or the estimate of the level of service that has been performed at each reporting date. R&D expenses amounted to $4.4 million and $0.1 million for the three months ended March 31, 2021 and the period from January 3, 2020 (inception) through March 31, 2020, respectively.

Stock-Based Compensation

In October 2020, the Company’s board of directors and stockholder approved the 2020 Equity Incentive Plan ("2020 Plan"). The Company's board of directors adopted the 2021 Equity Incentive Plan ("2021 Plan") in February 2021 and the Company's stockholders approved the 2021 Plan in March 2021. The 2021 Plan is the successor and continuation of the 2020 Plan. Under both the 2021 and 2020 Plans, awards are measured at fair value and recognized over the requisite service period. Forfeitures are accounted for in the period they occur. The Company estimates the fair value of each stock-based award on the date of grant using the Black-Scholes option pricing model which requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected term of the option.

From January 3, 2020 through October 26, 2020, Company employees participated in Arena’s stock incentive plan and therefore the Company used Arena’s Black-Scholes fair value, and underlying inputs and assumptions, to recognize stock-based compensation. Stock-based awards were measured at fair value and recognized over the requisite service period. There were no forfeitures.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, without consideration of potentially dilutive securities. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock and potentially dilutive securities outstanding for the period. As the Company has reported a net loss for the periods presented, diluted net loss per share of common stock is the same as basic net loss per share of common stock for the periods.

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive:



	Three Months Ended March 31, 2021		Period from January 3, 2020 (Inception) through March 31, 2020
Options to purchase common stock		1,248,156		—
Restricted stock awards, issued but unvested		348,450		—
Total		1,596,606		—

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which supersedes FASB Accounting Standards Codification Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. For companies that are not emerging growth companies, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. For emerging growth companies, the ASU was to be effective for fiscal years beginning after December 15, 2019. However, in June 2020, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for certain Entities, which deferred the effective date of ASU 2016-02 for certain entities. As a result, the ASU is now effective for emerging growth companies for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company plans to adopt the new standard in the first quarter of 2022 using the modified retrospective method, under which the Company applies Topic 842 to existing and new leases as of January 1, 2022, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company is currently evaluating the impact the adoption of these ASUs will have on its financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes—Simplifying the Accounting for Income Taxes (ASU 2019-12). Among other items, the amendments in ASU 2019-12 simplify the accounting treatment of tax law changes and year-to-date losses in interim periods. An entity generally recognizes the effects of a change in tax law in the period of enactment; however, there is an exception for tax laws with delayed effective dates. Under current guidance, an entity may not adjust its annual effective tax rate for a tax law change until the period in which the law is effective. This exception was removed under ASU 2019-12, thereby providing that all effects of a tax law change are recognized in the period of enactment, including adjustment of the estimated annual effective tax rate. Regarding year-to-date losses in interim periods, an entity is required to estimate its annual effective tax rate for the full fiscal year at the end of each interim period and use that rate to calculate its income taxes on a year-to-date basis. However, current guidance provides an exception that when a loss in an interim period exceeds the anticipated loss for the year, the income tax benefit is limited to the amount that would be recognized if the year-to-date loss were the anticipated loss for the full year. ASU 2019-12 removes this exception and provides that, in this situation, an entity would compute its income tax benefit at each interim period based on its estimated annual effective tax rate. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those annual periods. Early adoption is permitted. The Company adopted this new standard in the first quarter of 2021 and it did not have a material impact on its financial statements and related disclosures.

Risks and Uncertainties

In December 2019, COVID-19, a novel strain of coronavirus, was first identified in Wuhan, China. In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and the virus has spread to over 100 countries, including the United States. The impact of this pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world.

Potential impacts to the Company’s business include, but are not limited to, temporary closures of facilities of its vendors, disruptions or restrictions on its employees’ ability to travel, disruptions to or delays in ongoing laboratory experiments, preclinical studies, clinical trials, third-party manufacturing supply and other operations, the potential diversion of healthcare resources away from the conduct of clinical trials to focus on pandemic concerns, interruptions or delays in the operations of the U.S. Food and Drug Administration or other regulatory authorities, and the Company’s ability to raise capital and conduct business development activities.

Note 3. Fair Value Measurements

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

As of March 31, 2021 and December 31, 2020, the Company did not have financial assets or liabilities that are measured at fair value on a recurring basis.

Note 4. Accrued Other Expenses

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


	As of March 31, 2021		As of December 31, 2020
	(unaudited)
Accrued financing costs	$	664	$	639
Accrued consulting fees		—		115
Accrued other		35		91
Total	$	699	$	845

Note 5. Convertible Preferred Stock and Stockholders’ Equity (Deficit)

Amended and Restated Certificate of Incorporation

In March 2021, the Company amended and restated the Company’s certificate of incorporation to, among other things, increase the authorized shares of voting common stock, non-voting common stock and preferred stock to 300,000,000 shares, 10,000,000 shares and 10,000,000 shares, respectively.

Voting Common Stock and Non-Voting Common Stock

As of March 31, 2021, the Company had 12,939,140 shares of voting common stock outstanding, excluding 348,450 shares subject to repurchase, and 3,629,400 shares of non-voting common stock outstanding. As of December 31, 2020, the Company had 3,840,540 shares of voting common stock outstanding, excluding 348,450 shares subject to repurchase. 3,840,540 shares were purchased by Arena for aggregate consideration of $0.10 in January 2020.

Series A Preferred Stock

In October 2020, the Company issued and sold 5,600,000 shares of Series A Preferred Stock at a price of $10.00 per share, resulting in gross proceeds of $56.0 million, including 100,000 shares purchased by Arena. The Company incurred $0.2 million in issuance costs related to the Series A Preferred Stock financing. On March 16, 2021, immediately prior to the closing of the IPO, 2,630,000 shares of the Series A Preferred Stock were exchanged for 3,629,400 shares of non-voting common stock. Upon the closing of the IPO, 2,970,000 shares of the Series A Preferred Stock were automatically converted into 4,098,600 shares of voting common stock. Following the IPO, there were no shares of Series A Preferred Stock outstanding.

The Series A Preferred Stock had been classified as temporary equity in the accompanying balance sheet as of December 31, 2020, in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities whose redemption is based upon certain change in control events outside of the Company’s control, including liquidation, sale or change of control of the Company.

Reconciliation of Changes in Convertible Preferred Stock and Stockholders’ Equity (Deficit)

The following tables document the changes in convertible preferred stock and stockholders' equity (deficit) for the three months ended March 31, 2021 and the period from January 3, 2020 (inception) through March 31, 2020 (unaudited):


	Convertible Preferred Stock						Preferred Stock				Voting Common Stock				Non-Voting Common Stock
(in thousands, except shares)	Number of Shares			Amount			Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity (Deficit)
Balance at December 31, 2020		5,600,000		$	55,795			—	$	—		3,840,540	$	—		—	$	—	$	11,708	$	(14,400	)	$	(2,692	)
Conversion of convertible preferred stock to common stock in connection with initial public offering		(5,600,000	)		(55,795	)		—		—		4,098,600		—		3,629,400		—		55,795					55,795
Issuance of common stock in initial public offering, net		—			—			—		—		5,000,000		1		—		—		71,848					71,849
Stock-based compensation		—			—			—		—		—		—		—		—		333		—			333
Net loss		—			—			—		—		—		—		—		—		—		(5,699	)		(5,699	)
Balance at March 31, 2021		—		$	—			—	$	—		12,939,140	$	1		3,629,400	$	—	$	139,684	$	(20,099	)	$	119,586


	Convertible Preferred Stock				Preferred Stock				Voting Common Stock				Non-Voting Common Stock
(in thousands, except shares)	Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Number of Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity (Deficit)
Balance at January 3, 2020 (Inception)		—	$	—		—	$	—		—	$	—		—	$	—	$	—	$	—		$	—
Purchase of common stock by Arena Pharmaceuticals, Inc.		—		—		—		—		3,840,540		—		—		—		—		—			—
Arena Pharmaceuticals, Inc. capital contributions		—		—		—		—		—		—		—		—		39		—			39
Stock-based compensation		—		—		—		—		—		—		—		—		95		—			95
Net loss		—		—		—		—		—		—		—		—		—		(174	)		(174	)
Balance at March 31, 2020		—	$	—		—	$	—		3,840,540	$	—		-	$	—	$	134	$	(174	)	$	(40	)

Note 6. Agreements with Arena Pharmaceuticals, Inc.

The Company entered into a license agreement (the "License Agreement"), a services agreement (the "Services Agreement"), and a royalty purchase agreement (the "Royalty Purchase Agreement") in October 2020 with Arena. The following section summarizes these related party agreements.

License Agreement

Pursuant to the License Agreement, the Company obtained an exclusive, royalty bearing, sublicensable, worldwide license under certain know-how and patents of Arena to develop and commercialize LP352 for any use in humans, LP143 for the treatment of any central nervous system ("CNS") indication in humans (excluding the treatment, prevention or amelioration of pain or any gastrointestinal, non-CNS autoimmune or cardiovascular disorder), and LP659 for the treatment of selected CNS indications in humans (pharmaceutical products containing any such compounds, Licensed Products). As consideration for the rights granted to the Company under the License Agreement, the Company will be required to pay to Arena a mid-single digit royalty on net sales of Licensed Products of LP352, and a low-single digit royalty on net sales of all other Licensed Products, by the Company, its affiliates or its sublicensees, subject to standard reductions. The Company’s royalty obligations continue on a Licensed Product-by-Licensed Product and country-by-country basis until the later of the (i) tenth anniversary of the first commercial sale of such product in such country or (ii) expiration of the last-to-expire valid claim of the patents licensed by us under the License Agreement covering the manufacture, use or sale of such product in such country.

Services Agreement

In connection with the License Agreement, the Company also entered into a Services Agreement with Arena under which Arena agreed to perform certain research and development services, general administrative services, management services and other mutually agreed services for the Company and receive service fees therefor on an hourly rate based on an annual full time equivalent rate agreed upon by the parties. Arena will invoice the Company for services provided on a monthly basis, in arrears. The Services Agreement shall continue until December 31, 2021 and shall automatically renew for successive one-year terms unless terminated by either party. Payments for services provided under the Services Agreement are recorded to R&D expenses or G&A expenses, on the statement of operations, as appropriate. For the three months ended March 31, 2021, the Company recorded $246,000 and $69,000 in R&D expenses and G&A expenses, respectively. For the period from January 3, 2020 (inception) through March 31, 2020, the Company recorded $16,000 and $79,000 in R&D expenses and G&A expenses, respectively. There were $231,000 and $241,000 of related party amounts related to the Services Agreement in accounts payable as of March 31, 2021 and December 31, 2020, respectively.

Royalty Purchase Agreement

In October 2020, the Company entered into a Royalty Purchase Agreement with 356 Royalty Inc., a wholly owned subsidiary of Arena ("356 Royalty") and Arena, pursuant to which we purchased the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin, owed or otherwise payable to 356 Royalty by Eisai Inc. and Eisai Co., Ltd. pursuant to the Transaction Agreement, by and among 356 Royalty, Eisai Inc. and Eisai Co., Ltd. The Company made a one-time payment to Arena of $0.1 million. The Company expensed this amount to research and development expense on the statement of operations and comprehensive loss as lorcaserin is subject to regulatory approval and there are risks and uncertainties as to whether royalties will ultimately be paid and collected.

Note 7. Stock-Based Compensation

Equity Incentive Plan

In October 2020, the Company’s board of directors and stockholder approved the 2020 Plan, which provided for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, and stock appreciation rights to its employees, members of its board of directors, and consultants. The Company’s board of directors determined the exercise price, vesting and expiration period of the grants under the 2020 Plan.

The Company's board of directors adopted the 2021 Plan in February 2021 and the Company's stockholders approved the 2021 Plan in March 2021. The 2021 Plan became effective on March 11, 2021. The 2021 Plan is the successor and continuation of the 2020 Plan. No additional awards may be granted under the 2020 Plan and all outstanding awards under the 2020 Plan remain subject to the terms of the 2020 Plan. The 2021 Plan authorizes and provides for the issuance of up to 2,834,232 shares of common stock, which amount will be increased to the extent that awards granted under the 2021 Plan are forfeited, expire or are settled for cash (except as otherwise provided in the 2021 Plan). Recipients of stock options are eligible to purchase shares of the Company’s common stock at an exercise price equal to no less than the estimated fair market value of such stock on the date of grant. The maximum term of options granted under the 2020 and 2021 Plans (or collectively, the “Equity Plans”) is ten years and, in general, the options issued under the Equity Plans vest over a one to four year period from the vesting commencement date. There are 1,586,076 shares available for grant under the 2021 Plan as of March 31, 2021.

Stock Award Grants under the Equity Plans

A summary of the Company’s Equity Plans stock option activity is as follows:


	Number of Options Outstanding			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in Years)
Balance at December 31, 2020		873,264	$		3.42		9.9
Options granted		374,892			12.10		9.9
Options exercised		—			—		—
Options cancelled		—			—		—
Balance at March 31, 2021		1,248,156	$		6.03		9.7

Options exercisable at March 31, 2021		356,187	$		3.18		9.6

Options exercisable at March 31, 2021 included 7,737 vested stock options and 348,450 stock options that are subject to an early exercise provision. The intrinsic value of options outstanding and exercisable as of March 31, 2021 were $12.9 million and $4.7 million, respectively.

The following table presents the weighted-average assumptions used for the stock option grants for the three months ended March 31, 2021 and for the period from January 3, 2020 (inception) through March 31, 2020, along with the related grant date fair value:



	Three Months Ended March 31, 2021			Period from January 3, 2020 (Inception) through March 31, 2020
Stock price	$	12.10			—
Risk-free interest rate		0.84	%		—
Dividend yield		0.00	%		—
Expected volatility		73.87	%		—
Expected life (years)		6.0			—
Estimated grant date fair value per share of award granted	$	7.80			—

Determination of Fair Value of Common Stock. Prior to the IPO, there was no public market for the Company's common stock, and therefore, the estimated fair value of common stock for option grants was determined by the Company’s board of directors as of the date of each option grant, with input from management, considering the most recently available third-party valuations of common stock and the board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. Historically, these independent third-party valuations of our equity instruments were performed contemporaneously with identified value inflection points. These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation ("Practice Aid"). The Practice Aid identifies various available methods for allocating the enterprise value across classes of series of capital stock in determining the fair value of the common stock at each valuation date.

In addition to considering the results of these independent third-party valuations, the Company’s board of directors considered various objective and subjective factors to determine the fair value of its common stock as of each grant date, including: the prices of the preferred stock sold to or exchanged between outside investors in arm’s length transactions and the rights, preferences and privileges of the preferred stock as compared to those of the Company’s common stock including liquidation preferences of the Company’s preferred stock; the progress of the Company’s research and development programs, including the status and results of preclinical and clinical trials for product candidates; the stage of development and material risks related to the Company’s business; external market and other conditions affecting the biopharmaceutical industry and trends within the biopharmaceutical industry; the Company’s business conditions and projections; the Company’s financial position and its historical and forecasted performance and operating results; the lack of an active public market for the Company’s common stock and preferred stock; the likelihood of achieving a liquidity event for the Company’s securityholders, such as an initial public offering or a sale of the Company in light of prevailing market conditions; the hiring of key personnel and the experience of management; and the analysis of initial public offerings and the market performance of similar companies in the biopharmaceutical industry, as well as trends and developments in the biopharmaceutical industry.

Significant changes to the key assumptions underlying the factors used could result in different fair values of common stock at each valuation date.

Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities similar to the expected term of the awards.

Expected dividend yield. The Company bases the expected dividend yield assumption on the fact that it has never paid cash dividends and has no present intention to pay cash dividends and, therefore, used an expected dividend yield of zero.

Expected volatility. Since the Company is a newly public company and does not have a trading history for its common stock, the expected volatility assumption is based on volatilities of a peer group of similar companies whose share prices are publicly available. The peer group was developed based on companies in the biotechnology industry. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Expected life. The expected life represents the period of time that options are expected to be outstanding. Because the Company does not have historical exercise behavior, it determines the expected life assumption using the simplified method, for employees, which is an average of the contractual term of the option and its vesting period. The expected term for nonemployee options is equal to the contractual term.

After the closing of the IPO in March 2021, the Company began utilizing the closing stock price of the common stock on the Nasdaq Global Market as both the exercise price and an input to the Black Scholes option pricing model to determine stock-based compensation expense.

In October 2020, 348,450 restricted stock awards were granted to an employee under the 2020 Plan, which vest over two years and had an estimated fair value of $3.12 per share at the time of grant.

Stock Award Grants under the Arena Amended and Restated 2017 Long-Term Incentive Plan (Arena 2017 LTIP)

Prior to October 27, 2020, the Company did not have its own equity incentive plan. Stock award grants from the period of January 3, 2020 through October 26, 2020, were made under the Arena 2017 LTIP, a plan approved by Arena’s stockholders. Under the Arena 2017 LTIP, Arena may grant incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and performance awards.

Under the Arena 2017 LTIP, 70,000 stock options were granted to the Company’s Chief Executive Officer. Stock options under the Arena 2017 LTIP generally vest over four years with 25% of the shares subject to each option vesting on the first anniversary of the grant date and the remainder vesting monthly over the following three years in equal installments and have contractual terms of seven years. All option grants provide for an option exercise price equal to the closing market value share of Arena’s common stock on the date of grant.

As of October 27, 2020, in connection with the Series A Preferred Stock financing, the employees of the Company are no longer eligible to participate in the Arena 2017 LTIP.

The following table presents the assumptions used for the stock option grants under the Arena 2017 LTIP for the period from January 3, 2020 (inception) through March 31, 2020, along with the related grant date fair value:


	For the Period January 3, 2020 (Inception) through March 31, 2020
Stock price	$	44.60
Risk-free interest rate		0.89	%
Dividend yield		0.00	%
Expected volatility		57.80	%
Expected life (years)		4.5
Estimated grant date fair value per share of award granted	$	21.02

In connection with the Series A Preferred Stock financing and the formal commencement of the Chief Executive Officer’s (Mr. Lind’s) employment with the Company, Mr. Lind entered into a Separation Agreement with Arena ("Separation Agreement"). Pursuant to the Separation Agreement, Mr. Lind voluntarily resigned his employment with Arena, effective October 27, 2020. Such resignation did not affect Mr. Lind’s status as the President and Chief Executive Officer of the Company. The Separation Agreement provided for the acceleration of vesting and the extension of the exercise period for equity awards outstanding at Arena as of the separation date.

Stock-Based Compensation Expense

Stock-based compensation expense recognized for all equity awards has been reported in the statements of operations and comprehensive loss as follows:



(in thousands)	Three Months Ended March 31, 2021		Period from January 3, 2020 (Inception) through March 31, 2020
Research and development	$	70	$	16
General and administrative		263		79
Total	$	333	$	95

As of March 31, 2021, unrecognized stock-based compensation expense was $5.5 million, which is expected to be recognized over a remaining weighted-average period of approximately 3.4 years.

Employee Stock Purchase Plan

The Company's board of directors adopted the 2021 Employee Stock Purchase Plan (“ESPP”) in February 2021, the Company's stockholders approved the ESPP in March 2021 and it became effective on March 11, 2021. The ESPP initially authorizes the issuance of 353,339 shares of common stock under purchase rights granted to our employees. The ESPP permits eligible employees, who elect to participate in an offering under the ESPP, to contribute up to 15% of their eligible earnings (as defined in the ESPP) towards the purchase of shares of common stock. Unless otherwise determined by the Company's board of directors, the price at which stock is purchased under the ESPP is equal will be 85% of the fair market value of the Company’s common stock on the commencement date of each offering period or the relevant purchase date, whichever is lower. There are certain service requirements for an employee to be eligible to participate in the ESPP, and no employee may purchase shares under the ESPP at a rate in excess of $25,000 worth of common stock (as determined in accordance with the ESPP). Offering durations under the ESPP may not be longer than 27 months, and the Company may specify shorter purchase periods within each offering. The ESPP is considered a compensatory plan as defined by the authoritative guidance for stock-based compensation. As of March 31, 2021, the ESPP had not yet been implemented.

Note 8. Commitments and Contingencies

Leases

The Company leases certain office space in San Diego, California under a month to month lease. Rent payments are approximately $1,000 per month. Rent expense totaled approximately $3,000 and $1,000 for the three months ended March 31, 2021 and 2020, respectively.

Contingencies

From time to time, the Company may become subject to claims or suits arising in the ordinary course of business. The Company will accrue a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. As of March 31, 2021 and December 31, 2020, the Company is not a party to any litigation.

Note 9. Employment Benefits

The Company’s employees who had been Arena employees were eligible to participate in Arena’s employee 401(k) salary deferral plan, which covers all Arena employees, through October 26, 2020. After that date, the Company’s employees were no longer eligible to participate in Arena’s employee 401(k) salary deferral plan. Employees made contributions by withholding a percentage of their salary up to the IRC annual limit. The Company made matching contributions of $2,000 for the three months ended March 31, 2020. The Company plans to establish a 401(k) salary deferral plan for its employees in 2021.

Note 10. Subsequent Events

On April 9, 2021, the underwriters in the IPO exercised their option to purchase an additional 298,360 shares of common stock of the Company at a public offering price of $16.00 per share. The Company raised $4.4 million in net proceeds from this purchase after deducting underwriters’ discounts and commissions of $0.3 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed financial statements and related notes included elsewhere in this Quarterly Report and our audited consolidated financial statements and related notes included in the final prospectus dated March 11, 2021 that forms a part of our Registration Statement on Form S-1, as amended (File No. 333-253329), as filed with the Securities and Exchange Commission ("SEC"), pursuant to Rule 424(b) under the Securities Act of 1933, as amended ("Securities Act"), on March 12, 2021 (the "Prospectus"). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the “Risk Factors” section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

Overview

We are a clinical-stage biopharmaceutical company focused on developing novel, transformative medicines for neurological diseases. We were formed in January 2020 by Arena Pharmaceuticals, Inc. ("Arena") to advance a portfolio of centrally acting product candidates designed to be highly selective for specific G protein-coupled receptors ("GPCRs"). Our small molecule product candidates were discovered out of the same platform at Arena that represents a culmination of more than 20 years of GPCR research. Our pipeline includes:


	•		LP352, an oral, centrally acting, 5-hydroxytryptamine 2c receptor subtype (“5-HT2c”) superagonist, that is currently in a multiple-ascending dose (“MAD”) portion of a Phase 1 clinical trial and is expected to be initiated in a Phase 1b/2a clinical trial for the treatment of developmental and epileptic encephalopathies (“DEEs”), including Dravet syndrome and Lennox-Gastaut syndrome, among others, in the first quarter of 2022;


	•		LP143, a centrally acting, full cannabinoid type 2 receptor (“CB2”) agonist in investigational new drug ("IND") application enabling studies for neurodegenerative diseases associated with neuroinflammation caused by microglial activation, including amyotrophic lateral sclerosis (“ALS”); and


	•		LP659, a centrally acting, sphingosine-1-phosphate (S1P) receptor subtypes 1 and 5 (“S1P1,5”) receptor modulator in IND-enabling studies for CNS neuroinflammatory diseases.

We also have additional earlier discovery stage compounds.

In October 2020, we entered into a License Agreement with Arena (the "Arena License Agreement"), pursuant to which Arena granted us an exclusive, royalty bearing, sublicensable, worldwide license to develop and commercialize LP352, LP143 and LP659 (pharmaceutical products containing any such compounds, the Licensed Products).

The following table provides an overview of our current programs:

* We hold worldwide rights to our product candidates in our therapeutic areas of focus for such compounds through the Arena License Agreement.

We were incorporated in January 2020. Since our inception, we have devoted substantially all of our resources to organizing and staffing our company, research and development activities, business planning, raising capital, in-licensing intellectual property rights and establishing our intellectual property portfolio, and providing general and administrative support for these operations. We have principally financed our operations to date through the private placement of convertible preferred stock and the completion of our initial public offering of our common stock in March 2021 (the "IPO"). To date, we have raised gross proceeds of approximately $56.0 million from the issuance of our convertible preferred stock and $84.8 million from our IPO. As of March 31, 2021, we had cash and cash equivalents of $120.9 million.

We have incurred net losses since our inception. Our net losses were $5.7 million and $0.2 million for the three months ended March 31, 2021 and the period from January 3, 2020 (inception) through March 31, 2020, respectively. As of March 31, 2021, we had an accumulated deficit of $20.1 million. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our clinical trials and preclinical studies and our expenditures on other research and development activities. We expect that our expenses and operating losses will increase substantially as product candidates advance through preclinical studies and clinical trials, and as we expand our clinical, regulatory, quality and manufacturing capabilities, incur significant commercialization expenses for marketing, sales, manufacturing and distribution, if we obtain marketing approval for any of our product candidates, and incur additional costs associated with operating as a public company. We expect that our existing cash and cash equivalents will be sufficient to fund our operations for at least the next 12 months. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect.

We do not expect to generate any revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates, which will not be for many years, if ever. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, reduce or terminate our research and development programs or other operations, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

The global COVID-19 pandemic continues to rapidly evolve. As a result of the COVID-19 pandemic, we have faced and may continue to face delays in meeting our anticipated timelines for our ongoing and planned clinical trials. Specifically, the initiation of the MAD portion of the Phase 1 clinical trial of LP352 was delayed, in part, as a result of the impact of the COVID-19 pandemic on the clinical site in the United Kingdom that conducted the single-ascending dose ("SAD") portion of the Phase 1 clinical trial for LP352, and subsequently we modified the protocol and relocated the MAD portion of such trial to a new clinical site in the United States. The extent of the impact of COVID-19 on our business, operations and development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak and its impact on our development activities, planned clinical trial enrollment, future trial sites, contract research organizations ("CROs"), third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with our employees working remotely. We will continue to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain.

Agreements with Arena

Below is a summary of the key terms for our license and other agreements with Arena.

License Agreement

In October 2020, we entered into the Arena License Agreement, pursuant to which we obtained an exclusive, worldwide license of certain intellectual property for the Licensed Products. As consideration for the rights granted to us under the Arena License Agreement, we will be required to pay to Arena a mid-single digit royalty on net sales of Licensed Products of LP352, and a low-single digit royalty on net sales of all other Licensed Products, by us, our affiliates or our sublicensees, subject to standard reductions. Our royalty obligations continue on a Licensed Product-by-Licensed Product and country-by-country basis until the later of the (i) tenth anniversary of the first commercial sale of such product in such country or (ii) expiration of the last-to-expire valid claim of the patents licensed to us under the Arena License Agreement covering the manufacture, use or sale of such product in such country.

Royalty Purchase Agreement

In October 2020, we entered into a Royalty Purchase Agreement with Arena and 356 Royalty Inc., a wholly owned subsidiary of Arena (356 Royalty), pursuant to which we purchased the right to receive all milestone payments, royalties, interest and other payments relating to net sales of lorcaserin, in all countries and territories of the world (Territory) owed or otherwise payable to 356 Royalty by Eisai pursuant to a Transaction Agreement dated December 28, 2016, as amended (Transaction Agreement), by and among 356 Royalty and Eisai, for an upfront payment of $0.1 million. Lorcaserin is currently in a Phase 3 clinical trial for Dravet syndrome.

Services Agreement

In October 2020, we entered into the Services Agreement under which Arena agreed to perform certain research and development services, general administrative services, management services and other mutually agreed services for us and receive service fees therefor on an hourly rate based on an annual full time equivalent rate agreed upon by the parties.

Components of Our Results of Operations

Operating Expenses

Our operating expenses consist of (i) research and development expenses and (ii) general and administrative expenses.

Research and Development

Our research and development expenses consist primarily of direct and indirect costs incurred in connection with the preclinical and clinical development of our product candidates.

Direct costs include:


	•		external research and development expenses incurred under agreements with Arena, CROs, investigative sites, and consultants to conduct our preclinical studies and clinical trials; and


	•		costs related to manufacturing our product candidates for preclinical studies and clinical trials, including fees paid to third-party manufacturers.

Indirect costs include:


	•		personnel-related costs, which include salaries, payroll taxes, employee benefits, and other employee-related costs, including stock-based compensation, for personnel engaged in research and development functions; and


	•		facilities and other various expenses.

Research and development expenses are recognized as incurred and payments made prior to the receipt of goods or services to be used in research and development are capitalized until the goods or services are received. We track direct costs by stage of program, clinical or preclinical. However, we do not track indirect costs on a program specific or stage of program basis because these costs are deployed across multiple programs and, as such, are not separately classified.

As described above, Arena charges us for certain expenses associated with these research and development functions under the Services Agreement. We expect to assume responsibility from Arena for these research and development functions as we continue to grow our business and build our internal research and development capabilities. We expect that our research and development expenses will increase substantially for the foreseeable future as we continue the development of our product candidates, particularly as product candidates in later stages of development generally have higher development costs than those in earlier stages of development. We cannot determine with certainty the timing of initiation, the duration or the completion costs of future clinical trials and preclinical studies of our product candidates due to the inherently unpredictable nature of clinical and preclinical development. Clinical and preclinical development timelines, the probability of success and development costs can differ materially from expectations.

We anticipate that we will make determinations as to which product candidates and development programs to pursue and how much funding to direct to each product candidate or program on an ongoing basis in response to the results of ongoing and future preclinical studies and clinical trials, regulatory developments and our ongoing assessments as to each product candidate’s commercial potential. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Our research and development expenses may vary significantly based on a variety of factors, such as:


	•		the scope, rate of progress, expense and results of our preclinical development activities;


	•		the phase of development of our product candidates;


	•		per patient clinical trial costs;


	•		the number of clinical trials required for approval;


	•		the number of sites included in our ongoing and planned clinical trials;


	•		the number of patients that participate in our ongoing and planned clinical trials;


	•		the countries in which our clinical trials are conducted;


	•		uncertainties in clinical trial design and patient enrollment or drop out or discontinuation rates, particularly in light of the current COVID-19 pandemic environment;


	•		potential additional safety monitoring requested by regulatory agencies;


	•		the duration of patient participation in our ongoing and planned clinical trials and follow-up;


	•		the efficacy and safety profile of our product candidates;


	•		the timing, receipt, and terms of any approvals from applicable regulatory authorities including the FDA and foreign regulatory authorities;


	•		significant and changing government regulation and regulatory guidance;


	•		potential additional trials requested by regulatory agencies;


	•		the cost and timing of manufacturing our product candidates;


	•		establishing clinical and commercial manufacturing capabilities or making arrangements with third-party manufacturers in order to ensure that we or our third-party manufacturers are able to make product successfully;


	•		the extent to which we establish additional strategic collaborations or other arrangements;


	•		the impact of any business interruptions to our operations or to those of the third parties with whom we work, including Arena, particularly in light of the current COVID-19 pandemic environment; and


	•		maintaining a continued acceptable safety profile of our product candidates following approval, if any, of our product candidates.

A change in the outcome of any of these variables with respect to the development of any of our product candidates could significantly change the costs and timing associated with the development of that product candidate.

General and Administrative

General and administrative expenses consist primarily of personnel-related costs, which include salaries, payroll taxes, employee benefits, and other employee-related costs, including stock-based compensation, for personnel in executive, finance and other administrative functions. Other significant costs include legal fees relating to corporate matters, professional fees for accounting and consulting services and facility-related costs.

As described above, Arena charges us for certain expenses associated with these general and administrative functions under the Services Agreement. We expect that our ongoing general and administrative expenses will increase substantially for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company and in building our internal resources to become less reliant on Arena. These increased costs will include increased expenses related to audit, legal, regulatory and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor and public relations costs associated with operating as a public company.

Financial Operations Overview

Results of Operations

The following table summarizes our results of operations for the three months ended March 31, 2021 and the period from January 3, 2020 (inception) through March 31, 2020:



(in thousands)	Three Months Ended March 31, 2021			Period from January 3, 2020 (Inception) through March 31, 2020
Operating expenses:
Research and development	$	4,398		$	59
General and administrative		1,305			115
Total operating expenses		5,703			174
Loss from operations		(5,703	)		(174	)
Interest income		4			—
Net loss and comprehensive loss	$	(5,699	)	$	(174	)

Research and Development Expenses

The following table summarizes our research and development expenses for the three months ended March 31, 2021 and the period from January 3, 2020 (inception) through March 31, 2020: