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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

OR

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: 001-40869

THESEUS PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware

83-0712806

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

245 Main Street

Cambridge, Massachusetts

02142

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (857400-9491

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, $0.0001 par value per share

THRX

The Nasdaq Global Market, LLC

(Nasdaq Global Select Market)

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

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

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

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 November 1, 2021, the registrant had 38,702,650 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

1

Condensed Balance Sheets

1

Condensed Statements of Operations Comprehensive Loss

2

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

3

Condensed Statements of Cash Flows

4

Notes to Condensed Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

36

Item 1A.

Risk Factors

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

100

Item 3.

Defaults Upon Senior Securities

101

Item 4.

Mine Safety Disclosures

101

Item 5.

Other Information

101

Item 6.

Exhibits

101

Signatures

104

i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, or Quarterly Report, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as information included in oral statements or other written statements made or to be made by us, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve substantial risks and uncertainties. All statements contained in this Quarterly Report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “target,” “plan,” “expect,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements contained in this Quarterly Report include, but are not limited to, statements about:

the ability of our preclinical studies and future clinical trials to demonstrate safety and efficacy of product candidates and other positive results;
the initiation, timing, progress, results and cost of our research and development programs and our current and future preclinical studies and planned clinical trials for current product candidate and other product candidates we may develop, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the studies or trials will become available, and our research and development programs;
the timing, scope and likelihood of regulatory filings and approvals, including timing of investigational new drug applications and final approval the U.S. Food and Drug Administration of our current product candidate and any future product candidates we may develop;
our ability to develop and advance our current product candidate and development programs into, and successfully complete, clinical trials;
our manufacturing, commercialization, and marketing capabilities and strategy;
our plans relating to commercializing product candidates, if approved, including the geographic areas of focus and sales strategy;
the need to hire additional personnel and our ability to attract and retain such personnel;
the size of the market opportunity for our product candidate and development programs, including our estimates of the number of patients who suffer from the diseases we are targeting;
our competitive position and the success of competing therapies that are or may become available;
the beneficial characteristics, and the potential safety, efficacy and therapeutic effects of product candidates;
the potential advantages of our integrated research and development approach;
our ability to obtain and maintain regulatory approval of product candidates;
our plans relating to the further development of product candidates, including additional indications we may pursue;
existing regulations and regulatory developments in the United States, Europe and other jurisdictions;

ii

our expectations regarding the impact of the COVID-19 pandemic on our business;
our intellectual property position, including the scope of protection we are able to establish and maintain for intellectual property rights covering our current product candidates and other product candidates we may develop, including the extensions of existing patent terms where available, the validity of intellectual property rights held by third parties, and our ability not to infringe, misappropriate or otherwise violate any third-party intellectual property rights;
our continued reliance on third parties to conduct additional preclinical studies and planned clinical trials of product candidates, and for the manufacture of product candidates for preclinical studies and clinical trials;
our ability to obtain, and negotiate favorable terms of, any collaboration, licensing or other arrangements that may be necessary or desirable to develop, manufacture or commercialize product candidates;
the pricing and reimbursement of current product candidates and other product candidates we may develop, if approved;
the rate and degree of market acceptance and clinical utility of current product candidates and other product candidates we may develop;
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
our financial performance;
the period over which we estimate our existing cash and cash equivalents will be sufficient to fund our future operating expenses and capital expenditure requirements;
the impact of laws and regulations;
our expectations regarding the period during which we will remain an emerging growth company under the JOBS Act;
our anticipated use of our existing cash resources;
developments relating to our competitors and our industry; and
other risks and uncertainties, including those listed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report.

These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described in the section titled “Risk Factors” in Part II, Item 1A and elsewhere in this Quarterly Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

iii

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report or to conform these statements to actual results or to changes in our expectations, except as required by law.

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 Quarterly 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 this Quarterly Report and the documents that we reference in this Quarterly Report and have filed with the Securities and Exchange Commission with the understanding that our actual future results, performance and events and circumstances may be materially different from what we expect.

iv

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Theseus Pharmaceuticals, Inc.

Condensed Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

    

NINE MONTHS ENDED

    

YEAR ENDED

SEPTEMBER 30, 

DECEMBER 31, 

2021

2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

90,404

$

8,457

Prepaid expenses and other current assets

 

1,082

 

113

Total current assets

 

91,486

 

8,570

Property and equipment, net

 

 

1

Other assets

 

6,133

 

43

Total assets

$

97,619

$

8,614

Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Deficit

 

 

  

Current liabilities:

 

 

  

Accounts payable

$

2,392

$

1,132

Accrued expenses and other current liabilities

 

3,288

 

463

Total current liabilities

 

5,680

 

1,595

Restricted stock liability, net of current portion

 

903

 

Total liabilities

 

6,583

 

1,595

Commitments and contingencies (Note 7)

 

 

  

Redeemable convertible preferred stock:

 

 

  

Series A redeemable convertible preferred stock, $0.0001 par value; 22,136,987 shares authorized, 16,734,179 issued and outstanding as of September 30, 2021 and December 31, 2020; preference in liquidation of $22,137 as of September 30, 2021

 

41,289

 

41,289

Series B redeemable convertible preferred stock, $0.0001 par value; 11,564,094 shares authorized, 8,741,726 and 0 issued and outstanding as of September 30, 2021 and December 31, 2020, respectively; preference in liquidation of $100,100 as of September 30, 2021

 

99,892

 

Stockholders’ deficit:

 

 

  

Common stock, $0.0001 par value; 41,083,993 and 29,054,797 shares authorized as of September 30, 2021 and December 31, 2020, respectively; 2,054,555 and 1,708,625 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively

 

 

Additional paid-in capital

 

2,777

 

Accumulated deficit

 

(52,922)

 

(34,270)

Total stockholders’ deficit

 

(50,145)

 

(34,270)

Total liabilities, redeemable convertible preferred stock and stockholders’ deficit

$

97,619

$

8,614

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

1

Theseus Pharmaceuticals, Inc.

Condensed Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

(Unaudited)

THREE MONTHS ENDED SEPTEMBER 30, 

NINE MONTHS ENDED SEPTEMBER 30, 

2021

2020

    

2021

    

2020

Operating expenses:

 

  

 

Research and development

$

4,996

$

1,275

$

13,306

$

3,470

General and administrative

2,378

154

 

5,371

 

478

Total operating expenses

7,374

1,429

 

18,677

 

3,948

Loss from operations

(7,374)

(1,429)

 

(18,677)

 

(3,948)

Other income (expense), net:

 

 

Change in fair value of preferred stock tranche rights

 

 

(3,969)

Change in fair value of anti-dilution rights

 

 

(1,190)

Other income (expense), net

2

 

25

 

Total other income (expense), net

2

 

25

 

(5,159)

Net loss

$

(7,372)

$

(1,429)

$

(18,652)

$

(9,107)

Comprehensive loss

$

(7,372)

$

(1,429)

$

(18,652)

$

(9,107)

Net loss attributable to common stockholders—basic and diluted (Note 13)

$

(7,372)

$

(1,429)

$

(18,652)

$

(9,107)

Net loss per share attributable to common stockholders—basic and diluted

$

(5.16)

$

(2.12)

$

(18.69)

$

(18.11)

Weighted-average common stock outstanding—basic and diluted

1,428,054

672,911

 

997,949

502,804

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

2

Theseus Pharmaceuticals, Inc.

Condensed Statements of Redeemable Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share data)

(Unaudited)

REDEEMABLE CONVERTIBLE PREFERRED 

STOCK

SERIES A

SERIES B

COMMON STOCK

ADDITIONAL

TOTAL 

$0.0001 PAR VALUE

$0.0001 PAR VALUE

$0.0001 PAR VALUE

PAID-IN

ACCUMULATED

STOCKHOLDERS’

  

SHARES

  

AMOUNT

  

SHARES

  

AMOUNT

 

 

SHARES

  

AMOUNT

  

CAPITAL

  

DEFICIT

  

DEFICIT

Balance at December 31, 2020

16,734,179

$

41,289

$

882,789

$

$

$

(34,270)

$

(34,270)

Issuance of Series B redeemable convertible preferred stock, net of issuance costs of $208

8,741,726

99,892

Vesting of restricted stock

85,430

Stock-based compensation

44

44

Net loss

(4,473)

(4,473)

Balance at March 31, 2021

16,734,179

41,289

8,741,726

99,892

968,219

44

(38,743)

(38,699)

Vesting of restricted stock

85,430

Stock-based compensation

1,440

1,440

Net loss

(6,807)

(6,807)

Balance at June 30, 2021

16,734,179

41,289

8,741,726

99,892

1,053,649

1,484

(45,550)

(44,066)

Vesting of restricted stock

85,430

Stock-based compensation

1,293

1,293

Net loss

(7,372)

(7,372)

Balance at September 30, 2021

16,734,179

$

41,289

8,741,726

$

99,892

1,139,079

$

$

2,777

$

(52,922)

$

(50,145)

REDEEMABLE CONVERTIBLE PREFERRED

STOCK

SERIES A

SERIES B

COMMON STOCK

ADDITIONAL

TOTAL

$0.0001 PAR VALUE

$0.0001 PAR VALUE

$0.0001 PAR VALUE

PAID-IN

ACCUMULATED

STOCKHOLDERS’

  

SHARES

  

AMOUNT

  

SHARES

  

AMOUNT

 

 

SHARES

  

AMOUNT

  

CAPITAL

  

DEFICIT

  

DEFICIT

Balance at December 31, 2019

6,668,818

$

6,857

$

288,568

$

$

813

$

(10,220)

$

(9,407)

Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $3

2,640,603

4,855

Vesting of restricted stock

134,156

Stock-based compensation

31

31

Net loss

(2,265)

(2,265)

Balance at March 31, 2020

9,309,421

11,712

422,724

844

(12,485)

(11,641)

Vesting of restricted stock

223,758

Stock-based compensation

203

203

Net loss

(5,413)

(5,413)

Balance at June 30, 2020

9,309,421

11,712

646,482

1,047

(17,898)

(16,851)

Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $3

4,401,006

11,665

Vesting of restricted stock

77,578

Stock-based compensation

34

34

Net loss

(1,429)

(1,429)

Balance at September 30, 2020

13,710,427

$

23,377

$

724,060

$

$

1,081

$

(19,327)

$

(18,246)

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

3

Theseus Pharmaceuticals, Inc.

Condensed Statements of Cash Flows

(in thousands)

(Unaudited)

NINE MONTHS ENDED

SEPTEMBER 30, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net loss

$

(18,652)

$

(9,107)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Depreciation expense

 

1

 

2

Stock-based compensation expense

 

2,777

 

268

Change in fair value of preferred stock tranche rights

 

 

3,969

Change in fair value of anti-dilution rights

 

 

1,190

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

(969)

 

7

Accounts payable

 

837

 

Accrued expenses and other current liabilities

 

1,367

 

78

Other assets

 

(2,640)

 

(21)

Net cash used in operating activities

 

(17,279)

 

(3,614)

Cash flows from investing activities:

 

  

 

  

Net cash used in investing activities

 

 

Cash flows from financing activities:

 

  

 

  

Proceeds from issuance of Series A redeemable convertible preferred stock, net of issuance costs of $3

 

 

7,994

Proceeds from issuance of Series B redeemable convertible preferred stock, net of issuance costs of $208

 

99,892

 

Payment of initial public offering costs

 

(1,683)

 

Proceeds from early exercise of options

 

1,395

 

Net cash provided by financing activities

 

99,604

 

7,994

Net increase in cash and cash equivalents

 

82,325

 

4,380

Cash and cash equivalents at beginning of year

 

8,457

 

1,317

Cash and cash equivalents at end of period

$

90,782

$

5,697

Supplemental disclosure of cash flows:

 

 

Deferred financing costs in accounts payable

$

423

$

Deferred financing costs in accrued expenses

$

965

$

The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of each of the dates shown below:

NINE MONTHS ENDED

SEPTEMBER 30, 

2021

    

2020

Cash and cash equivalents

$

90,404

$

5,697

Restricted cash (included in other assets)

378

Total cash, cash equivalents, and restricted cash

$

90,782

$

5,697

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

4

Theseus Pharmaceuticals, Inc.

Notes to Condensed Financial Statements

(Unaudited)

1. Nature of the Business

Theseus Pharmaceuticals, Inc. (“Theseus” or the “Company”) is a biopharmaceutical company focused on improving the lives of cancer patients through the discovery, development and commercialization of transformative targeted therapies. The Company was incorporated in December 2017 under the laws of the State of Delaware, and its principal offices are in Cambridge, Massachusetts.

On September 27, 2021, the Company effected a one-for-1.32286 reverse stock split of shares of the Company’s common stock and convertible preferred stock. All of the share and per share amounts included in the accompanying condensed financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital. Shares of common stock underlying outstanding stock options were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased in accordance with the terms of the appropriate securities agreements. Stockholders entitled to fractional shares as a result of the reverse stock split received a cash payment in lieu of receiving fractional shares.

On October 6, 2021, the Company’s registration statements on Form S-1 relating to its initial public offering of its common stock were declared effective by the Securities and Exchange Commission (“SEC”). In the initial public offering (“IPO”), which closed on October 12, 2021, the Company issued and sold 10,000,200 shares of common stock at a public offering price of $16.00 per share. The aggregate gross proceeds, before deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company, were approximately $160.0 million. Upon the closing of the IPO, all of the Company’s outstanding shares of redeemable convertible preferred stock automatically converted into 25,475,905 shares of common stock. On October 25, 2021, the underwriters partially exercised their over-allotment option to purchase an additional 1,171,990 shares of common stock for $16.00 per share. The exercise of the over-allotment option closed on October 27, 2021, and the aggregate gross proceeds, before deducting underwriting discounts and commissions and other estimated offering expenses payable by the Company, were approximately $18.8 million. The remainder of the underwriters’ over-allotment option expired unexercised.

In connection with the closing of the IPO, the Company amended and restated its certificate of incorporation to among other things: (a) authorize 500,000,000 shares of voting common stock; (b) eliminate all references to the previously existing series of redeemable convertible preferred stock; (c) authorize 50,000,000 shares of preferred stock that may be issued from time to time by the Company’s board of directors (the “Board”) in one or more series.

Basis of Presentation

The Company’s condensed financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the ASC and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

The accompanying condensed financial statements and footnotes to the financial statements have been prepared on the same basis as the most recently audited annual financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2021 and the results of its operations and its cash flows for the nine-month periods ended September 30, 2021 and 2020. The results for the three- and nine-month periods ended September 30, 2021 are not necessarily indicative of results to be expected for the year ending

5

December 31, 2021, any other interim periods, or any future year or period. These condensed financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2020 included in the Company’s final prospectus for its IPO dated October 6, 2021, filed pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”), with the SEC on October 7, 2021.

Liquidity

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. The Company’s development programs will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Because of the numerous risks and uncertainties associated with product development, the Company is unable to predict the timing or amount of increased expenses or when or if the Company will be able to achieve or maintain profitability. Even if the Company is able to generate revenue from product sales, the Company may not become profitable. If the Company fails to become profitable or is unable to sustain profitability on a continuing basis, then the Company may be unable to continue its operations at planned levels and be forced to reduce or terminate its operations. The Company expects to incur substantial operating losses and negative cash flows from operations for the foreseeable future.

In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed financial statements are issued. As of September 30, 2021, the Company had an accumulated deficit of $52.9 million. During the nine months ended September 30, 2021, the Company incurred a loss of $18.7 million and utilized $17.3 million of cash in operations. The Company expects to continue to generate operating losses in the foreseeable future. The Company expects that its cash and cash equivalents of $90.4 million at September 30, 2021, together with the proceeds from the IPO, will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next twelve months from issuance of the accompanying condensed financial statements.

2. Summary of Significant Accounting Policies

The significant accounting policies and estimates used in the preparation of the accompanying condensed financial statements are described in the Company’s audited financial statements for the years ended December 31, 2020 and 2019, included in the Company’s final prospectus for its IPO dated October 6, 2021, filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on October 7, 2021. There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2021, except as noted below.

Unaudited Interim Financial Information

The accompanying condensed balance sheet as of September 30, 2021, and the condensed statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders’ deficit for the three- and nine-month periods ended September 30, 2021 and 2020 and statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited. The condensed interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary for the fair presentation of the Company’s financial position as of September 30, 2021 and the results of its operations for the three- and nine-month periods ended September 30, 2021 and 2020 and its cash flows for

6

the nine months ended September 30, 2021 and 2020. The financial data and other information disclosed in these notes related to the three- and nine-month periods ended September 30, 2021 and 2020 are also unaudited. The results for the three- and nine-month periods ended September 30, 2021 are not necessarily indicative of results to be expected for the full year or for any other subsequent interim period.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting periods. Estimates and judgments are based on historical information and other market-specific or various relevant assumptions, including in certain circumstances, future projections, that management believes to be reasonable under the circumstances. Actual results could differ materially from estimates. Significant estimates and assumptions are used for, but not limited to, the accruals for research and development expenses, the determination of fair value of equity instruments, preferred stock tranche rights and the anti-dilution right, and for periods prior to the completion of the IPO, stock-based compensation expense.

Cash and Cash Equivalents

Cash includes cash in readily available checking accounts. Cash is carried at cost, which approximates its fair value. The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents are carried at fair market value.

Restricted Cash

Restricted cash consists of a restricted cash deposit of $0.4 million which serves as collateral for a letter of credit issued to the landlord of the Company’s leased facility for a security deposit upon entering into the lease in September 2021. The Company classified this amount as restricted cash in the accompanying condensed balance sheet within other assets as of September 30, 2021. As of December 31, 2020, the Company held no restricted cash.

Comprehensive Loss

Comprehensive loss includes net loss as well as other changes in stockholders’ deficit that result from transactions and economic events other than those with stockholders. For the three and nine months ended September 31, 2021 and 2020, there were no differences between net loss and comprehensive loss.

Deferred Issuance Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred issuance costs until such financings are consummated. After consummation of such an equity financing, these costs are recorded as a reduction of the proceeds generated as a result of the offering. Should the planned equity financing be abandoned, the deferred issuance costs, currently recorded within other assets, will be expensed immediately as a charge to operating expenses in the statements of operations and comprehensive loss. The Company recorded deferred issuance costs of $3.1 million within other assets as of September 30, 2021, and recorded no deferred issuance costs as of December 31, 2020.

Recently Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company

7

believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheets for all leases and disclosing key information about leasing arrangements. This ASU was originally proposed to be effective for annual reporting periods after December 15, 2019, however, in July 2019, the FASB delayed the effective date to January 2021 and ASU 2020-05 delayed the effective date to January 2022. The Company is currently evaluating the impact that this standard will have on its financial statements and related disclosures, and expects to adopt the new standard in the fourth quarter of 2021.

3. Fair Value of Financial Assets and Liabilities

Assets and liabilities measured at fair value on a recurring basis are as follows (in thousands):

    

SEPTEMBER 30, 

    

    

    

DESCRIPTION

2021

LEVEL 1

LEVEL 2

LEVEL 3

Assets

 

 

  

 

  

 

  

Cash equivalents

$

89,526

$

89,526

$

$

Total financial assets

$

89,526

$

89,526

$

$

During the year ended December 31, 2020, there were no assets or liabilities measured at fair value. During the nine months ended September 30, 2021 and the year ended December 31, 2020, there were no transfers between fair value levels. The fair values of the Company’s cash equivalents, consisting of its money market funds, are based on quoted market prices in active markets without any valuation adjustment.

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.

Tranche Rights

The Company determined that its obligations to issue, and the Company’s investors’ obligation to purchase, additional shares of Series A convertible preferred stock (“Series A”) at a fixed price (i.e. the issuance price) pursuant to the Tranche Rights (see Note 8) in three subsequent tranches following the initial closing of the Series A financing represented freestanding financial instruments. The Company issued 2,267,813 and 3,779,688 shares in January 2020 and July 2020, respectively, pursuant to these rights, at a purchase price of $1.32 per share. The final tranche was cancelled upon termination of the Series A preferred stock purchase agreement (“Series A Agreement”) in December 2020.

The Tranche Rights were classified as a liability on the Company’s balance sheets and initially recorded at fair value. The Tranche Rights were subsequently revalued until the tranches were settled, with changes in fair value for each reporting period recognized in other income (expense), net in the statement of operations and comprehensive loss. Upon the purchase of the Tranche Right shares, the fair value of the related Tranche Right was recognized as Series A redeemable convertible preferred stock. The obligation was fully satisfied in December 2020 when the Series A Agreement was terminated, with the remaining value recognized in the statement of operations and comprehensive loss. As such, the Company does not have a Tranche Right liability recorded as of December 31, 2020 or September 30, 2021.

The fair value of Tranche Rights was based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. A change in the assumptions related to the valuation of the Tranche Rights could have a significant impact on the value of the obligation. Each Tranche

8

Right was valued as a forward contract. The values were determined using a probability-weighted present value calculation. In determining the fair values of the Tranche Rights, estimates and assumptions impacting fair value included the estimated future values of the Company’s Series A, discount rates, estimated time to tranche closing, and probability of each tranche closing. The Company determined the per share future value of the Series A shares by back-solving to the initial proceeds of the Series A financing. The Company remeasured each Tranche Right at each reporting period and prior to settlement.

Anti-dilution Right

In accordance with a license agreement between the Company and ARIAD Pharmaceuticals, Inc. (“ARIAD”), the Company was obligated to issue to ARIAD additional Series A shares for no consideration upon the issuance of certain Milestone Shares (see Note 8) to certain investors (“Anti-dilution Right”).

The Company determined that the Anti-dilution Right was a freestanding financial instrument. The freestanding financial instrument was classified as an asset or liability on the Company’s balance sheets and initially recorded at fair value. The fair value of the Anti-dilution Right was based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. A change in the assumptions related to the valuation of the Anti-dilution Rights could have a significant impact on the value of the obligation.

The Anti-dilution Right was valued as a forward contract. The value was determined using a probability-weighted present value calculation. In determining the fair values of the obligation, estimates and assumptions impacting fair value included the estimated future values of the Company’s Series A shares, discount rates, estimated time to share issuance and probability of each share issuance. The Company determined the per share future value of the Series A shares by back-solving to the initial proceeds of the Series A financing.

The Anti-dilution Right was subsequently revalued until anti-dilution shares were issued or the Anti-dilution Right was terminated, with changes in fair value for each reporting period recognized in other income (expense), net in the statements of operations and comprehensive loss. Upon issuance of the Anti-dilution shares, the fair value of the Anti-dilution Right was recognized as Series A redeemable convertible preferred stock.

In accordance with the Anti-dilution Right, the Company issued ARIAD 372,791 and 621,318 additional Series A shares in January 2020 and July 2020, respectively, upon the issuance of Milestone Shares to its investors. The obligation was fully satisfied in December 2020 in conjunction with the termination of the Series A Agreement; as such, the Company does not have an Anti-dilution Right liability as of December 31, 2020 or September 30, 2021. ARIAD did not receive additional Series A shares upon the termination of the Series A Agreement.

The Company remeasured the Tranche Rights and the Anti-dilution Right at each reporting period and prior to settlement. The following reflects the ranges of significant quantitative inputs used in the valuation of the Tranche Rights and the Anti-dilution Right during 2020:

    

FOR THE YEAR ENDED

DECEMBER 31, 2020

Stand-alone Series A Preferred Stock price (spot price)

$1.84 - $5.93

Risk-free rate

1.6%

Discount factor

0.9923 - 1.0

Time to milestone event (years)

0.0 years - 0.5 years

Probability of tranche closing

0% - 100%

9

The following table provides a rollforward of the aggregate fair value of the Company’s Tranche Rights and Anti-dilution Right (in thousands):

    

PREFERRED STOCK 

    

ANTI-DILUTION 

TRANCHE RIGHTS

RIGHT

Balance as of December 31, 2019

$

2,220

$

1,142

Change in fair value

 

3,969

 

1,190

Fair value recognized as Series A upon settlement of right

 

(6,189)

 

(2,332)

Balance as of December 31, 2020

$

$

4. Accrued Expenses

Accrued expenses consisted of the following as of September 30, 2021 and as of December 31, 2020 (in thousands):

    

SEPTEMBER 30, 

    

DECEMBER 31, 

2021

2020

Accrued research and development

$

664

$

310

Accrued legal

 

112

 

143

Accrued compensation and benefits

 

738

 

10

Accrued other

 

1,280

 

Restricted stock liability, current

 

494

 

Total accrued expenses and other current liabilities

$

3,288

$

463

5. Property and Equipment, net

Property and equipment, net consisted of the following as of September 30, 2021 and as of December 31, 2020 (in thousands):

    

SEPTEMBER 30, 

    

DECEMBER 31, 

2021

2020

Computer equipment

$

$

6

Less: accumulated depreciation

 

 

(5)

Property and equipment, net

$

$

1

Depreciation expense for the nine months ended September 30, 2021 and 2020 was approximately $1,000 and $2,000, respectively. There were no impairments recorded to date.

6. License Agreements

Agreement Description

In June 2018, the Company entered into a license agreement with ARIAD, for an exclusive, transferable (subject to certain restrictions), sublicensable (subject to certain conditions), worldwide license, under certain of ARIAD’s patent rights, know-how and compounds and a certain ARIAD chemical library, to develop, use, manufacture, market and commercialize certain compounds, and products that contain such compounds, that are therapeutically useful for the treatment of diseases and disorders in humans, including with respect to c-

10

KIT, a type of receptor tyrosine kinase and tumor marker (also known as CD117 and stem cell factor receptor).

Pursuant to the license agreement, in exchange for an exclusive license, a non-exclusive license, and certain laboratory equipment, the Company issued to ARIAD 621,318 shares of Series A and a non-exclusive license to certain intellectual property. In addition, the Company provided to ARIAD the Anti-dilution Right described in Note 3. The non-exclusive licenses were granted to the parties in order to administratively facilitate the flow of data between the parties without infringement on existing patents; all of the economic value of the agreement is concentrated in the exclusive license. The laboratory equipment the Company acquired was not material.

The Company accounted for the agreement as an asset acquisition. The transaction price was measured as the fair value of the 621,318 shares of Series A issued to ARIAD and the fair value of the Anti-Dilution Right (as described in Note 3), or approximately $1.4 million. The Company determined that the licensed intellectual property represented in-process research and development assets with no alternative future use. As a result, the cost to license the intellectual property of $1.4 million was recognized as research and development expense on the Company’s statements of operations in the year-ended December 31, 2018.

The Company is required to pay ARIAD tiered royalty payments that are low- to mid-single digits of the Company’s future net sales and those of its sublicensees of each product comprising a licensed ARIAD compound in each country. The Company is also responsible for costs relating to the prosecution and maintenance of the licensed patents. The agreement contains anti-stacking and generic competition provisions on the royalties whereby the Company may deduct a percentage of the amounts due for royalties from its payments if the Company enters into a third-party license agreement, and may reduce the rates in the event a generic product is being marketed and sold by a third party and the average net sales as measured over a specified period of time are at least a certain percentage lower than the average net sales during the a specified period of time immediately prior to the launch of the generic product.

The term of the agreement commenced in June 2018 and unless earlier terminated as provided in the agreement for breach of terms by either party or for convenience by the Company with advanced written notice, shall continue in full force and effect, on a country-by-country and product-by-product basis until the date on which the royalty term in such country with respect to such product expires. The royalty term is the period from the first commercial sale of such product in such country until the later of (a) the expiry of all patents that cover the product in such country or (b) ten years after the first commercial sale.

The license agreement terminates, on a product-by-product and country-by-country basis, on expiration of the royalty term for such product for the applicable country. Thereafter, the licenses from ARIAD to the Company with respect to such product for such country will convert to a fully paid, royalty-free, irrevocable and perpetual license.

7. Commitments and Contingencies

Legal Proceedings

The Company may from time to time be party to litigation arising in the ordinary course of business. The Company was not subject to any material legal proceedings during the nine months ended September 30, 2021 or the year ended December 31, 2020, and no material legal proceedings are currently pending or, to the best of the Company’s knowledge, threatened.

Leases

On September 16, 2021, the Company entered into an agreement to lease 7,351 square feet of office space in Cambridge, Massachusetts. The lease term is seven years, with a one-time option right to extend the term five additional years, and is expected to commence in the first quarter of 2022. The annual base rent under

11

the lease is approximately $0.8 million for the first lease year and is subject to annual increases of 3% thereafter. The Company provided a security deposit in the form of a letter of credit in the amount of approximately $0.4 million upon signing, pursuant to the terms of the lease.

The future minimum payments required under the lease as of September 30, 2021 are as follows (in thousands):

Year Ending September 30,

    

2021 (3 months)

$

2022

757

2023

780

2024

803

2025

827

Thereafter

2,635

Total minimum lease payments

$

5,802

8. Redeemable Convertible Preferred Stock

In June 2018, the Company entered into the Series A Agreement, under which it agreed to issue up to 13,203,025 shares of Series A in an initial closing and three subsequent milestone-based tranches, inclusive of the Anti-dilution Right. Under the Series A Agreement, the Company initially issued 3,779,688 shares to certain investors at a price of $1.32 per share for proceeds of $4.7 million, net of issuance costs of $0.3 million. The Series A Agreement provided for three additional tranche closings based on the achievement of three defined milestones (the “Tranche Rights”), pursuant to which certain investors were required to purchase, and the Company to sell, up to 7,559,376 additional shares of Series A at a price of $1.32 per share upon the achievement or waiver of the defined milestone. All Series A shares issued as a result of the achievement or waiver of a milestone are referred to as “Milestone Shares”. The Company concluded that the obligation and right to make future issuances of Series A shares under the Tranche Rights met the definition of a freestanding financial instrument, as the rights were legally detachable from the Series A (see Note 3). In January 2020 and July 2020, the Company sold 2,267,813 and 3,779,688 Milestone Shares, respectively, to certain investors at a price of $1.32 per share for proceeds of $8.0 million as a result of the achievement of two milestones. The requirement to purchase the remaining Milestone Shares was cancelled in December 2020 upon the determination by the Company that the program would be cancelled.

In conjunction with the Series A shares issued to certain investors, the Company issued shares to ARIAD pursuant to the ARIAD Agreement (Note 6). The Company issued 621,318 shares to ARIAD as part of the initial Series A closing in June 2018 in exchange for access to ARIAD’s intellectual property. Upon the issuance of Milestone Shares to certain investors in January 2020 and July 2020, the Company issued 372,791 and 621,318 Series A shares, respectively, to ARIAD as part of ARIAD’s Anti-dilution Right (see Note 3). The Company concluded that the Anti-dilution Right that represented the obligation to make future issuances of Series A to ARIAD met the definition of a freestanding financial instrument, as the rights were separately exercisable and legally detachable from the underlying license rights.

In August 2019, the Series A Agreement was amended to authorize the sale of 2,267,812 additional Series A shares to a certain majority stockholder of the Company in the form of an operating cash closing. These shares were sold for $1.32 per share, for gross proceeds of $3.0 million and recognized at their fair value of $2.6 million. In December 2020, the Series A Agreement was further amended to authorize the sale of 3,023,751 additional shares of Series A to the same investor in the form of a second operating cash closing. These shares were sold for a purchase price of $1.32 per share, for gross proceeds of $4.0 million and recognized at their fair value of $17.9 million. Immediately after the second operating cash closing in December 2020, the Series A Agreement was terminated; as such, as of December 31, 2020, no additional Series A shares were authorized to be issued. No terms of the existing Series A shares were amended in

12

conjunction with these transactions, and the operating cash closes were intended to provide for a certain investor to be able to purchase additional preferred stock shares outside of those issued in conjunction with milestone achievement and to provide the Company with cash to cover operating expenses.

In January 2021, the Company entered into the Series B Preferred Stock Purchase Agreement (“Series B Agreement”) whereby the Company agreed to issue 8,741,726 shares of Series B redeemable convertible preferred stock (“Series B”) at $11.45 per share to designated investors. The certificate of incorporation was amended and restated in connection with the execution of the Series B Agreement and authorized the new Series B shares. During the nine months ended September 30, 2021, the Company issued 8,741,726 shares of Series B for gross proceeds of $100.1 million.

As of September 30, 2021 and December 31, 2020, the redeemable convertible preferred stock (“preferred stock”) consisted of the following (in thousands, except share amounts):

SEPTEMBER 30, 2021

PREFERRED

PREFERRED STOCK

COMMON STOCK

STOCK

ISSUED AND

CARRYING

LIQUIDATION

ISSUABLE UPON

    

AUTHORIZED

    

OUTSTANDING

    

VALUE

    

VALUE

    

CONVERSION

Series A

 

22,136,987

 

16,734,179

$

41,289

$

22,137

 

16,734,179

Series B

 

11,564,094

 

8,741,726

 

99,892

 

100,100

 

8,741,726

Total

 

33,701,081

 

25,475,905

$

141,181

$

122,237

 

25,475,905

DECEMBER 31, 2020

PREFERRED

PREFERRED STOCK

COMMON STOCK

STOCK

ISSUED AND

CARRYING

LIQUIDATION

ISSUABLE UPON

    

AUTHORIZED

    

OUTSTANDING

    

VALUE

    

VALUE

    

CONVERSION

Series A

 

22,136,987

 

16,734,179

$

41,289

$

22,137

 

16,734,179

Series B

 

 

 

 

 

Total

 

22,136,987

 

16,734,179

$

41,289

$

22,137

 

16,734,179

The holders of Series A and Series B shares have the following rights and preferences:

Voting Rights

The holder of each share of preferred stock shall have the right to one vote for each share of common stock into which such preferred stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of common stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders’ meeting in accordance with the bylaws of this corporation.

Dividends

The holders of shares of preferred stock are entitled to receive dividends, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend on the common stock by the Company at a rate of 8.0% of the original issue price per annum, payable when, as and if declared by the Company’s board of directors (the “Board”). Such dividends shall not be cumulative. After payment of such dividends, any additional dividends or distributions shall be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate.

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Liquidation Rights

In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, asset transfer, merger or acquisition (a “Liquidation Event”), the holders of preferred stock shall be entitled to receive out of the proceeds or assets of this corporation available for distribution to its stockholders, prior and in preference to any distribution of the proceeds of such liquidation event to the holders of common stock by reason of their ownership thereof, an amount per share equal to the sum of the applicable original issue price.

Conversion

Each share of preferred stock shall automatically be converted into shares of common stock at the conversion rate at the time in effect for such series of preferred stock immediately upon the earlier of: (i) the closing of the Company’s sale of its common stock in a firm commitment underwritten public offering pursuant to an effective registration statement on Form S-1 under the Securities Act of 1933, as amended, that results in at least $30 million of gross proceeds and in connection with such offering the common stock is listed for trading on the Nasdaq Stock Market’s National Market, the New York Stock Exchange or another exchange or marketplace approved by the Board; or, (ii) the date, or the occurrence of an event, specified by vote or written consent or agreement of the holders of a majority of the then outstanding shares of preferred stock.

The conversion price of the preferred stock will be subject to a broad-based weighted average anti-dilution adjustment in the event that the Company issues additional equity securities (other than the issuance of shares reserved under any employee incentive plan and certain other customary exceptions) at a purchase price less than the applicable conversion price.

Redemption

The preferred stock is not redeemable at the option of the holder thereof except for in the event of a Liquidation Event if the corporation does not effect a dissolution under the general corporation law within 90 days after such Liquidation Event.

9. Common Stock

The Company was authorized to issue 41,083,993 and 29,054,797 and shares of $0.0001 par value common stock as of September 30, 2021 and as of December 31, 2020, respectively. 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.

Voting Rights

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.

Dividends

Holders of common stock shall be entitled to receive dividends if and when they are declared by the Board and after all holders of preferred stock have been paid according to their rights described in Note 8. As of September 30, 2021, no cash dividends have been declared or paid.

Liquidation Rights

After payment to the holders of preferred stock of their liquidation preferences, the remaining assets of the Company are distributed to the holders of common stock.

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Restricted Stock

The Company issued restricted common stock to its founders in May 2018, which vest monthly over five years through 2023. At issuance, these shares also contained certain performance-based vesting criteria which were associated with the milestone events for the Series A shares, two of which were achieved in 2020 (see Note 8). In December 2020 in conjunction with the Series A termination, the final performance-based vesting criteria was waived, leaving only service-based vesting criteria remaining as of September 30, 2021 and as of December 31, 2020.

As of the nine months ended September 30, 2021 and as of the year ended December 31, 2020, the Company has reserved the following shares of common stock for potential conversion of outstanding preferred stock, the vesting of restricted stock and the exercise of stock options:

    

SEPTEMBER 30, 

    

DECEMBER 31, 

2021

2020

Preferred Stock

 

25,475,905

 

16,734,179

Unvested restricted stock

 

915,476

 

825,836

Options to purchase common stock

 

4,699,003

 

1,852,141

Total

 

31,090,384

 

19,412,156

10. Stock-Based Compensation

2018 Stock Incentive Plan

The Company adopted the 2018 Stock Incentive Plan (the “Plan”) on June 13, 2018 for the issuance of stock options and other stock-based awards. As of September 30, 2021 and December 31, 2020, the number of shares reserved for issuance under the Plan as approved by the Board was 6,026,908 and 2,474,920 shares, respectively. There were 981,975 and 622,779 shares available for future grant under the Plan as of September 30, 2021 and December 31, 2020, respectively.

The Plan is administered by the Board. The exercise prices, vesting and other restrictions are determined at the discretion of the Board, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the common stock on the date of grant. Stock options awarded under the Plan expire ten years after the grant date unless the Board sets a shorter term. Vesting periods for awards under the plans are determined at the discretion of the Board. Stock options granted to employees and nonemployees typically vest over four years. Shares of restricted stock awards granted to employees, officers, members of the Board, advisors, and consultants of the Company typically vest over five years. Certain executives who are option holders are able to early exercise stock option awards, even prior to full vesting conditions being met. If and when this occurs, the stock option becomes outstanding restricted stock, and remains restricted until the remaining vesting terms are met. The Company can repurchase these early unvested exercised options. During the nine months ended September 30, 2021, 345,930 options to purchase common stock were exercised early and they continue to vest as restricted stock awards over the requisite service period. The Company has recognized the proceeds received of $1.4 million as a liability as of September 30, 2021.

2021 Equity Incentive Plan

In September 2021, the Company’s board of directors adopted, and its stockholders approved, the Theseus Pharmaceuticals, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), which became effective on October 6, 2021. The 2021 Plan provides for the grant of stock options, restricted shares, restricted stock units, and other types of equity awards. The aggregate number of shares of common stock reserved for issuance under the 2021 Plan is equal to the sum of (a) 4,395,080 shares of common stock, plus (b) up to 4,699,003 shares

15

of common stock subject to awards granted under the Plan that are outstanding on October 6, 2021 that are subsequently forfeited, expire or lapse unexercised or unsettled and shares of common stock issued pursuant to awards granted under the Plan that are outstanding on October 6, 2021 and that are subsequently forfeited to or reacquired by the Company, and (c) the additional annual increase in shares of common stock reserved for issuance under the 2021 Plan. On the first day of each fiscal year of the Company during the term of the 2021 Plan, commencing on January 1, 2023 and concluding on (and including) January 1, 2031, the aggregate number of shares of common stock reserved for issuance under the 2021 Plan shall automatically increase by a number equal to the lesser of (a) five percent (5%) of the total number of shares of common stock actually issued and outstanding on the last day of the preceding fiscal year or (b) a number of shares of common stock determined by the Company’s board of directors. The Company shall reserve and keep available such number of shares of common stock as will be sufficient to satisfy the requirements of the 2021 Plan.

Employee Stock Purchase Plan

In September 2021, the Company’s board of directors adopted, and its stockholders approved, the Theseus Pharmaceuticals, Inc. 2021 Employee Stock Purchase Plan (the “ESPP”), which became effective on October 6, 2021. The ESPP is administered by the Company’s board of directors or by one or more committees to which the Company’s board of directors delegates such administration. The number of shares of common stock reserved for issuance under the ESPP is 400,000, plus the additional annual increase in shares of common stock reserved for issuance under the ESPP. On the first day of each fiscal year of the Company during the term of the ESPP, commencing on January 1, 2023 and concluding on January 1, 2041, the aggregate number of shares of common stock reserved for issuance under the ESPP shall automatically increase by a number equal to the lesser of (i) one percent (1%) of the total number of shares of common stock actually issued and outstanding on the last day of the preceding fiscal year, and (ii) a number of shares of common stock determined by the Company’s board of directors. Shares of common stock issued pursuant to the ESPP may be authorized but unissued shares or treasury shares.

Stock Option Valuation

The assumptions that the Company used in Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted are as follows:

    

FOR THE NINE MONTHS ENDED

    

FOR THE YEAR ENDED

SEPTEMBER 30, 2021

DECEMBER 31, 2020

Risk-free interest rate

 

1.03%

0.51%

Expected term (in years)

 

5.2 - 6.1

5.97 - 6.00

Expected volatility

 

76.14% - 83.56%

98.17% - 98.21%

Expected dividend yield

 

0.00%

0.00%

16

A summary of option activity under the Plan during the nine months ended September 30, 2021 is as follows (in thousands except share, per share data and contractual terms):

    

    

WEIGHTED-AVERAGE

    

WEIGHTED-AVERAGE

    

PER-SHARE

REMAINING

AGGREGATE

SHARES

EXERCISE PRICE

CONTRACTUAL TERM

INTRINSIC VALUE

Outstanding as of December 31, 2020

1,852,141

$

0.32

 

9.98

$

6,566

Granted

3,195,931

 

5.10

 

  

 

  

Exercised

(345,930)

 

4.03

 

  

 

569

Cancelled

(3,139)

4.03

Outstanding as of September 30, 2021

4,699,003

$

3.29

 

9.48

 

43,079

Options vested and exercisable as of September 30, 2021

421,850

$

1.17

 

9.21

$

4,762

There were no options vested as of December 31, 2020. The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock.

The weighted-average per share grant date fair value of options granted during the nine months ended September 30, 2021 and 2020 was $4.67 and $0, respectively. Stock-based compensation expense for options granted of $2.5 million was recorded for the nine months ended September 30, 2021. As of September 30, 2021, there was $18.9 million of unrecognized stock-based compensation expense related to unvested stock options. The unrecognized stock-based compensation expense is estimated to be recognized over a period of 3.4 years as of September 30, 2021.

The total fair value of options vested during the nine months ended September 30, 2021 and 2020 was $1.5 million and $0, respectively.

Shares of Restricted Common Stock

The Company has granted shares of restricted common stock with the number of shares that vest based on the lesser of the time-based vesting over five years or the achievement of certain milestones. A summary of restricted stock activity under the Plan during the nine months ended September 30, 2021 and the year ended December 31, 2020 is as follows:

    

    

WEIGHTED-AVERAGE

PER-SHARE GRANT-DATE

SHARES

FAIR VALUE

Unvested shares at December 31, 2020

 

825,836

$

0.83

Vested

 

(256,290)

 

0.83

Unvested shares issued as a result of early option exercise

 

345,930

 

2.14

Unvested shares at September 30, 2021

 

915,476

$

2.66

In 2019, the restricted common stock awards were modified to add a new performance condition for the operating cash closing of the Series A financing, which was ultimately achieved in 2019. In 2020, the restricted common stock awards were modified to waive the final requirement to achieve a certain milestone. As a result, as of September 30, 2021, all of the unvested restricted common stock awards are only subject to

17

time-based vesting through the end of the requisite service period. As of September 30, 2021 and December 31, 2020, respectively, there was $0.1 million and $0.2 million of unrecognized stock-based compensation expense related to unvested restricted stock. The unrecognized stock-based compensation expense is estimated to be recognized over a period of 1.7 years as of September 30, 2021.

The total fair value of restricted stock vested during the nine months ended September 30, 2021 and the year ended December 31, 2020 was $2.6 million and $1.9 million, respectively. The Company recorded stock-based compensation expense for restricted stock of $0.3 million during both the nine months ended September 30, 2021 and 2020.

Stock-based Compensation Expense

Total stock-based compensation expense recorded as research and development and general and administrative expenses, respectively, for employees, directors and non-employees during the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands):

THREE MONTHS ENDED SEPTEMBER 30, 

NINE MONTHS ENDED SEPTEMBER 30, 

    

2021

    

2020

    

2021

    

2020

Research and development

$

585

$

26

$

1,479

$

207

General and administrative

708

8

1,298

61

$

1,293

$

34

$

2,777

$

268

11. Income Taxes

Income taxes for the nine months ended September 30, 2021 and 2020 have been calculated based on an estimated annual effective tax rate and certain discrete items. For the nine months ended September 30, 2021 and 2020, no income tax was recorded, as the Company is forecasting an ordinary pre-tax loss for the year ending December 31, 2021 and maintains a full valuation allowance against its net deferred tax assets. The Company has never been examined by the Internal Revenue Service or any other jurisdiction for any tax years and, as such, all years within the applicable statutes of limitations are potentially subject to audit.

12. Related Party Transactions

Iain Dukes is a founding member of the Company and has served as a member of the Board since June 2018. From June 2018 until April 2021, Dr. Dukes served as the Company's Chief Executive Officer under a consulting agreement, and from April 2021 until September 2021, Dr. Dukes served as the Executive Chairman. On September 15, 2021, Dr. Dukes transitioned into his role as Chairman of the Board. During the nine months ended September 30, 2021, Dr. Dukes earned compensation of $0.2 million, of which $30,000 was payable as of period end. As of September 30, 2021, Dr. Dukes owned 388,324 shares of the Company's common stock, and held options to purchase an additional 441,959 shares of common stock.

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13. Net Loss Per Share

Basic and diluted loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding (in thousands, except share and per share data):

THREE MONTHS ENDED SEPTEMBER 30, 

NINE MONTHS ENDED SEPTEMBER 30, 

    

2021

    

2020

    

2021

    

2020

Numerator:

Net loss

$

(7,372)

$

(1,429)

$

(18,652)

$

(9,107)

Net loss attributable to common stockholders - basic and diluted

$

(7,372)

$

(1,429)

$

(18,652)

$

(9,107)

Denominator:

 

 

 

 

Weighted-average common stock outstanding - basic and diluted

 

1,428,054

 

672,911

 

997,949

 

502,804

Net loss per share attributable to common stockholders - basic and diluted

$

(5.16)

$

(2.12)

$

(18.69)

$

(18.11)

The Company’s potentially dilutive securities, which include preferred stock, unvested restricted stock and stock options, have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of shares of common stock outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded the following from the computation of diluted net loss per share attributable to common stockholders for the nine months ended September 30, 2021 and 2020 because including them would have had an anti-dilutive effect:

NINE MONTHS ENDED SEPTEMBER 30,