Alto Neuroscience Inc

1. Description of the Business

Alto Neuroscience, Inc. (the “Company” or “Alto”) was incorporated in Delaware on March 25, 2019. The Company maintains its headquarters in Los Altos, California. The Company has one wholly-owned subsidiary in Australia that was formed during 2020 to conduct clinical trials.

Alto is a clinical stage biopharmaceutical company with a mission to redefine psychiatry by leveraging individuals’ neurobiology to develop personalized and highly effective treatment options. Through insights derived from the Company’s scalable and proprietary Precision Psychiatry Platform, which applies rigorous data science and robust analytics to data gathered by neurocognitive assessments, electroencephalography, and wearable devices, the Company aims to discover brain-based biomarkers to better identify which patients are more likely to respond to its novel product candidates. The Company’s current pipeline consists of five clinical-stage assets initially targeting major depressive disorder and schizophrenia populations as identified by independent brain-based biomarkers.

Liquidity and Capital Resources

The Company has incurred significant operating losses since inception and has relied upon equity financings to fund its operations. At December 31, 2023, the Company had an accumulated deficit of approximately $77.0 million. As the Company continues to incur losses, its transition to profitability will depend on the successful development, approval and commercialization of product candidates and on the generation of sufficient revenues to support its cost structure. No assurance can be provided that the Company will ever be profitable, and unless or until it becomes profitable, the Company will need to continue to raise additional capital.

In February 2024, the Company completed its initial public offering ("IPO") of its common stock. The Company issued and sold 9,246,000 shares of common stock at a public offering price of $16.00 per share, which included 1,206,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares, and received net proceeds of $133.1 million after deducting underwriting discounts and commissions and other offering costs (see Note 16). Upon completion of the IPO, all outstanding shares of the Company’s outstanding preferred stock converted into an aggregate of 13,664,261 shares of common stock. In addition, the IPO resulted in the net exercise and conversion of all outstanding Series A Preferred Stock Warrants for an aggregate of 72,631 shares of common stock (see Note 16). During the year ended December 31, 2023, the Company sold and issued 4,166,667 shares of Series B convertible preferred stock for gross proceeds of $25.0 million and sold and issued 9,547,802 shares of Series C convertible preferred stock for gross proceeds of $45.0 million (see Note 13). During the year ended December 31, 2022, the Company sold and issued 5,710,288 shares of Series B convertible preferred stock for gross proceeds of $34.3 million (see Note 13) and entered into a loan agreement, pursuant to which it borrowed $10.0 million at the initial closing, with a remaining option to borrow up to an incremental $10.0 million subject to the discretion of the lender (see Note 8). Management believes that its existing financial resources are sufficient to continue operating activities at least one year past the issuance date of these consolidated financial statements. The Company has based this estimate on assumptions that may prove to be wrong, and its operating plan may change as a result of many currently unknown factors. As a result, the Company could deplete its capital resources sooner than it currently expects. Future capital requirements will depend on many factors, including the timing and extent of spending on research and development and the market acceptance of the Company’s products. The Company will need to obtain additional financing in order to complete clinical studies and launch and commercialize any product candidates for which it receives regulatory approval. There can be no assurance that such financing will be available on acceptable terms or at all. However, the Company expects to finance its future cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, or licensing arrangements. If the Company is unable to obtain funding, the Company would be forced to delay, reduce, or eliminate some or all of its research and development programs, preclinical and clinical testing or commercialization efforts, which could adversely affect its business prospects.

2. Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.

The accompanying consolidated financial statements include the accounts of Alto and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation.

Emerging Growth Company Status and Smaller Reporting Company Status

The Company is an emerging growth company (“EGC”), as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted in 2012. Under the JOBS Act, EGCs can delay adopting new or revised accounting standards issued after the enactment of the JOBS Act until those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an EGC or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

The Company is also a “smaller reporting company” as defined in the Exchange Act. The Company may continue to be a smaller reporting company even after the Company is no longer an EGC. The Company may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as its voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of its second fiscal quarter, or its annual revenue is less than $100.0 million during the most recently completed fiscal year and its voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of its second fiscal quarter.

Stock Splits

In January 2023, the Company’s Board of Directors (the “Board”) approved a 1.1156 for 1 forward stock split of the Company’s issued and outstanding shares of Series B Preferred Stock (see Note 13), and a proportional adjustment to the existing conversion ratio, as well as the exercise price of the outstanding K2 Warrant. Accordingly, all Series B share and per share amounts for all periods presented in the financial statements have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the preferred stock conversion ratio.

In January 2024, the Board approved a 1 for 2.2241 reverse stock split of the Company’s issued and outstanding shares of common stock and options to purchase common stock under its 2019 Equity Incentive Plan. The reverse stock split reduced the number of shares of the Company’s issued and outstanding common stock, as well as the numbers of shares reserved and available for future issuance and underlying outstanding options to purchase common stock under its 2019 Equity Incentive Plan, on a 1 for 2.2241 basis, and resulted in an adjustment to the respective conversion ratios for the Company’s Series Seed convertible preferred stock, Series A convertible preferred stock, Series B convertible preferred stock, and Series C convertible preferred stock to account for the reverse stock split on any conversion of such series of convertible preferred stock into common stock. The reverse stock split did not affect the par values per share.

Recently Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments —

Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The guidance is effective for the Company beginning January 1, 2023 and changes how entities account for credit losses on financial assets and other instruments that are not measured at fair value through net income, including available-for-sale debt securities. The Company adopted the provisions of ASU 2016-13 prospectively beginning January 1, 2023. The adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842)(“ASC 842”), as amended, with guidance regarding the accounting for and disclosure of leases. This update requires lessees to recognize the liabilities related to all leases, including operating leases, with a term greater than 12 months on the balance sheets. This update also requires lessees and lessors to disclose key information about their leasing transactions.

Effective January 1, 2022, the Company adopted ASC 842 using the modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840. The Company elected the following practical expedients, which must be elected as a package and applied consistently to all of its leases at the transition date (including those for which the entity is a lessee or a lessor): i) the Company did not reassess whether any expired or existing contracts are or contain leases; ii) the Company did not reassess the lease classification for any expired or existing leases (that is, all existing leases that were classified as operating leases in accordance with ASC 840 are classified as operating leases, and all existing leases that were classified as capital leases in accordance with ASC 840 are classified as finance leases); and iii) the Company did not reassess initial direct costs for any existing leases. For leases that existed prior to the date of initial application of ASC 842 (which were previously classified as operating leases), a lessee may elect to use either the total lease term measured at lease inception under ASC 840 or the remaining lease term as of the date of initial application of ASC 842 in determining the period for which to measure its incremental borrowing rate. In transition to ASC 842, the Company utilized the remaining lease term of its leases in determining the appropriate incremental borrowing rates.

The adoption of this standard resulted in the recognition of operating lease right-of-use assets and operating lease liabilities of $0.6 million on the Company’s consolidated balance sheet at adoption. The lease liabilities were determined based on the present value of the remaining minimum lease payments. The adoption did not have a material impact on the Company’s consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU simplifies various areas related to the accounting for income taxes by removing certain exceptions to the general principles and by amending the existing guidance in order to improve consistency in application. ASU 2019-12 was adopted by the Company on January 1, 2022, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity(“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including certain convertible instruments and contracts on an entity’s own equity. Specifically, the new standard removes the separation models required for convertible debt with cash conversion features and convertible instruments with beneficial conversion features. It also removes certain settlement conditions that are currently required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation for convertible instruments. The Company adopted the provisions of ASU 2020-06 beginning January 1, 2022. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740). The standard requires disaggregation of the effective rate reconciliation into standard categories, enhances disclosure of income taxes paid, and modifies other income tax-related disclosures. The standard will be effective starting in annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting - Improving Reportable Segment Disclosures (Topic 280). The standard requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), a description of other segment items by reportable segment, and any additional measures of a segment's profit or loss used by the CODM when deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The standard is effective starting in annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 with early adoption permitted and requires retrospective application to all prior periods presented in the financial statements. The Company is currently assessing the impact of adopting this guidance on its consolidated financial statements.

3. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results may differ materially from those estimates. The most significant estimates and assumptions in the Company’s consolidated financial statements relate to the determination of the fair value of its common stock prior to the completion of the IPO (as an input for calculating stock-based compensation), estimating accrued or prepaid research and development expenses, and the valuation of the preferred stock warrant liability. These estimates and assumptions are based on current facts, historical experience, and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and, if applicable, highly liquid investments with an original maturity of three months or less when purchased. As of December 31, 2023 and 2022, the Company held $82.5 million and $48.3 million in total cash and cash equivalents, respectively.

Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. Periodically, the Company may maintain deposits in financial institutions in excess of government insured limits. Management believes that the Company is not exposed to significant credit risk as the Company’s deposits are held at financial institutions that management believes to be of high credit quality. The Company has not experienced any losses on these deposits.

Risk and Uncertainties

The Company’s future results of operations involve a number of risks and uncertainties. Factors that could affect the Company’s future operating results and cause actual results to vary materially from expectations include, but are not limited to, uncertainty of future clinical study results, the scope, rate of progress, and expense of the Company’s ongoing as well as any additional non-clinical studies, clinical trials and other research and development activities, clinical trial enrollment rate or design, the manufacturing of the Company’s product candidates, significant and changing government regulation, and the timing and receipt of any regulatory approvals.

The Company’s product candidates require approvals from the U.S. Food and Drug Administration and comparable foreign regulatory agencies prior to commercial sales in their respective jurisdictions. There can be no assurance that any product candidates will receive the necessary approvals. If the Company was denied approval, approval was delayed, or the Company was unable to maintain approval for any product candidate, it could have a materially adverse impact on the Company.

The Company is dependent upon third-party manufacturers to supply product for research and development activities in its programs. In particular, the Company relies and expects to continue to rely on a small number of manufacturers to supply it with its requirements for the active pharmaceutical ingredients and formulated drugs related to these programs. These programs could be adversely affected by a significant interruption in the supply of active pharmaceutical ingredients and formulated drugs.

Segments

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company has determined that its CODM is its President and Chief Executive Officer. The Company’s CODM reviews the Company’s financial information on an aggregated basis for purposes of allocating resources and assessing financial performance.

Fair Value of Financial Instruments

ASC 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances.

ASC 820 identifies fair value as the exchange price, or 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 a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following:

•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•Level 3 inputs are unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. See Note 13 for more information related to the Company’s Level 3 fair value measurement.

The carrying values reported in the Company’s balance sheets for cash and cash equivalents, prepaid expenses and other current assets, accounts payable, and accrued expenses are reasonable estimates of their fair values due to the short-term nature of these items.

Property and Equipment

Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Additions, major improvements, and replacements are capitalized. Depreciation of property and equipment is provided for by the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are capitalized and amortized over the shorter of the estimated useful lives of the assets or the remaining lease term. The estimated useful lives of other categories of property and equipment are as follows:

Impairment of Long-Lived Assets

Long-lived assets consist of property and equipment as well as right-of-use assets. Long-lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. If the sum of the estimated future undiscounted cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the asset. The Company has not recorded any impairment losses on long-lived assets during the years ended December 31, 2023 and 2022.

Leases

Effective January 1, 2022, the Company adopted ASC 842, Leases using the modified retrospective approach and utilizing the effective dates as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and short-term and long-term lease liabilities, as applicable.

Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. Certain adjustments to the right-of-use asset may be required for items such as incentives received. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment. To estimate its incremental borrowing rate, a credit rating applicable to the Company is estimated using a synthetic credit rating analysis since the Company does not currently have a rating agency-based credit rating.

The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew. Assumptions made by the Company at the commencement date are re-evaluated upon occurrence of certain events, including a lease modification. A lease modification results in a separate contract when the modification grants the lessee an additional right of use not included in the original lease and when lease payments increase commensurate with the standalone price for the additional right of use. When a lease modification results in a separate contract, it is accounted for in the same manner as a new lease.

The Company has elected to account for lease and non-lease components together as a single lease component for all underlying assets.

Debt Discount and Debt Issuance Costs

Debt issuance costs are deferred and presented as a reduction to long-term debt. The initial fair value of the preferred stock warrant liability that was issued to the lender under the Company’s loan agreement is treated as a debt discount. Debt discount and debt issuance costs are amortized using the effective interest rate method over the term of the loan. Amortization of debt discount and debt issuance costs are included within interest expense in the consolidated statements of operations and comprehensive loss.

Research and Development

Research and development expenses are comprised of costs incurred in clinical trials and in research and development activities. Such costs include: contract services performed by third parties in accordance with agreements established with clinical research organizations (“CROs”) and clinical trial sites; research agreements; laboratory costs and other supplies; and salaries and benefits, stock-based compensation, overhead costs, depreciation, and other related costs. Research and development costs are expensed to operations as the related obligation is incurred.

The Company has entered into various research and development contracts with research institutions, CROs, clinical manufacturing organizations, and other companies. These agreements are generally cancellable, and related payments are recorded as research and development expenses as incurred. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected on the consolidated balance sheet as prepaid or accrued expenses. The Company records accruals for estimated ongoing research costs. When evaluating the adequacy of the prepaid or accrued expenses, the Company analyzes progress of the studies, including the phase or completion of events, invoices received and contracted costs. Significant judgments and estimates may be made in determining the accrued or prepaid balances at the end of any reporting period. Actual results could differ from the Company’s estimates. The Company’s historical accrual estimates have not been materially different from the actual costs.

Costs incurred in obtaining product rights or technology licenses through asset acquisitions or pursuant to licensing agreements are charged to research and development expense if the purchased or licensed technology has not reached technological feasibility and has no alternative future use.

General and Administrative

General and administrative expenses generally consist of costs related to personnel, including stock-based compensation, third party service providers and professional fees, general office expenses, an allocation of rent and utilities expense, and legal costs associated with patents.

Stock-Based Compensation

The Company has stock-based compensation plans that cover the Company’s employees and nonemployees, which provides for grants of stock options, restricted stock awards (“RSAs”), and restricted stock units. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, which is affected principally by the estimated fair value of the Company’s common stock and requires management to make a number of other assumptions, including the expected life of the option, the volatility of the underlying stock, the risk-free interest rate, and expected dividends. Expected volatility is based on the historical share volatility of a set of comparable publicly traded companies over a period of time equal to the expected term of the options. Due to the lack of historical exercise history, the expected term of the Company’s stock options is determined using the “simplified” method. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

The fair value of common stock underlying the Company’s stock options and RSAs was estimated by the Company’s Board considering, among other things, contemporaneous valuations of the Company’s common stock prepared by unrelated third-party valuation firms.

The RSAs are valued based on the fair value of the Company’s common stock on the date of grant. The Company expenses stock-based compensation related to stock options and RSAs over the requisite service period using the straight-line method. All stock-based compensation costs are recorded in research and development expense or general and administrative expense in the consolidated statements of operations and comprehensive loss based upon the respective employee’s role within the Company. Forfeitures are recorded as they occur.

Grant Income

The Company recognizes income earned under grants from the federal government that provide funding for certain types of expenditures in connection with research and development activities over a contractually-defined period. Grant income is recognized in the period during which the related allowable costs are incurred and the related services are rendered. The government grants do not have any repayment or royalty obligations. Advance reimbursement for goods and services that were used in future research and development activities are deferred and recognized as expense in the period that the related goods are consumed, or services are performed. For the years ended December 31, 2023 and 2022, the Company recorded grant income of $0 and $1.7 million, respectively, for expenses for which it has been reimbursed, or is entitled to reimbursement, under such government grant agreements. Amounts requested for payment from the government related to such agreements that have not been collected are stated at the outstanding balance, less any reserve for expected credit losses, if necessary, as other receivables on the consolidated balance sheets.

Deferred Initial Public Offering Costs

Costs directly attributable to the Company's offering of its equity securities are deferred and capitalized as deferred offering costs. These costs primarily represent legal, underwriting and accounting costs related to the Company's efforts to raise capital through a public sale of its common stock. Future cost will be deferred until the completion of the IPO, which occurred on February 6, 2024, at which time they will be reclassified to additional paid-in capital as a reduction of the IPO proceeds. At December 31, 2023, and 2022, the Company had capitalized $2.2 million and $0 of deferred IPO costs, which is recorded within prepaid expenses and other current assets, respectively.

Convertible Preferred Stock

The Company has applied the guidance in ASC 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securitiesand has therefore classified its Series Seed, Series A, Series B and Series C convertible preferred stock as mezzanine equity. The convertible preferred stock is recorded outside of stockholders’ deficit because, in the event of certain deemed liquidation events considered not solely within the Company’s control, such as a merger, acquisition or sale of all or substantially all of the Company’s assets, the convertible preferred stock will become redeemable at the option of the holders. In the event of a deemed liquidation event, proceeds received from such transaction will be distributed in accordance with the liquidation preferences set forth in the Company’s amended and restated certificate of incorporation. The Company has determined not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because of the uncertainty of whether or when such an event would occur.

The Company accounts for its freestanding warrants on its convertible preferred stock as liabilities at fair value, as the instruments underlying the warrants are classified outside of permanent equity. The warrants are remeasured at each reporting period with changes in fair value recognized in the consolidated statements of operations and comprehensive loss. The warrants will continue to be remeasured to fair value until the earlier of the exercise of the warrants, the expiration of the warrants, or until such time as the warrants are no longer considered liability instruments.

Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of shares of common stock outstanding during the period excluding unvested restricted stock subject to repurchase. Diluted net loss per share is computed using the sum of the weighted-average number of shares of common stock outstanding during the period and the effect of dilutive securities.

The Company’s convertible preferred stock contractually entitles the holders of such shares to participate in dividends but does not contractually require the holders of such shares to participate in losses of the Company. Accordingly, in periods in which the Company reports a net loss, such losses are not allocated to such participating securities.

Comprehensive Loss

Comprehensive loss comprises net loss and other comprehensive income or loss. Other comprehensive income or loss consists only of foreign currency translation adjustments related to the consolidation of the Company’s foreign subsidiary.

Foreign Currency

Alto’s functional currency is the U.S. dollar. The functional currency of the Company’s foreign subsidiary is the same as its corresponding local currency. Assets and liabilities of the foreign subsidiary are translated at the spot rate in effect at the applicable reporting date. Likewise, expenses are translated at the average exchange rates in effect during the applicable period. The resulting foreign currency translation adjustment is recorded as accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ deficit. Foreign currency transaction gains and losses were not significant in any period presented.

Income Taxes

The Company accounts for income taxes under the liability method in accordance with FASB ASC 740, Income Taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established if it is more likely than not that all, or some portion, of deferred income tax assets will not be realized. The Company has recorded a full valuation allowance to reduce its net deferred income tax assets to zero. In the event the Company were to determine that it would be able to realize some or all its deferred income tax assets in the future, an adjustment to the deferred income tax asset valuation allowance would increase income in the period such determination was made.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained upon an examination. Any recognized income tax positions would be measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement would be reflected in the period in which the change in judgment occurs. At December 31, 2023 and 2022, the Company had no liability for income tax associated with uncertain tax positions. The Company would recognize any corresponding interest and penalties associated with its income tax positions in income tax expense. No income tax interest or penalties were incurred in the years ended December 31, 2023 and 2022.

4. Prepaid Expenses and Other Current Assets

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

5. Property and Equipment, Net

Property and equipment, net are as follows (in thousands):

Depreciation and amortization expense was approximately $0.4 million and $0.3 million for the years ended December 31, 2023 and 2022, respectively.

6. Accrued Expenses and Other Current Liabilities

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

7. Leases

On May 6, 2021, the Company entered into a new lease agreement for office space in Los Altos, California totaling 3,471 rentable square feet. The term of this lease commenced on June 1, 2021 and continues through May 31, 2024. The Company has an option to renew the lease for an additional period of two years. This is the Company’s only lease recognized on the balance sheet. The Company’s real estate lease agreement includes variable payments that are passed through by the landlord, such as insurance, taxes, and common area maintenance, and payments based on the usage of the asset. Pass-through charges and payments due to changes in usage of the asset are included within variable rent expense.

The Company’s lease agreement does not contain material residual value guarantees, restrictions, or covenants. The components of lease expense were as follows:

The components of lease expense were as follows for the years ended December 31, 2023 and 2022 (in thousands):

Supplemental cash flow information related to operating leases for the years ended December 31, 2023 and 2022 (in thousands):

Supplemental balance sheet information related to operating leases as of December 31, 2023 and 2022 was as follows (in thousands):

As of December 31, 2023, the future payments under operating leases were as follows (in thousands):

8. Debt

On December 16, 2022, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with K2 HealthVentures LLC as a lender, and other lenders (collectively, “Lender”), K2 HealthVentures LLC, as administrative agent for Lender (“Administrative Agent”), and Ankura Trust Company, LLC, as collateral agent for Lender. The Lender has agreed to make available to the Company term loans in an aggregate principal amount of up to $35.0 million under the Loan Agreement. The Company plans to use the proceeds of the term loans to support clinical development as well as for working capital and general corporate purposes. The Loan Agreement provides a term loan commitment of $35.0 million in four potential tranches: (i) a $10.0 million term loan facility funded on December 16, 2022 (the “First Tranche Term Loan”), (ii) a $7.5 million term loan facility (the “Second Tranche Term Loan”) available at the Company’s request between October 1, 2023 and March 1, 2024, subject to either positive data from the Company’s Phase 2b randomized controlled study of ALTO-100 or positive data from the Company’s Phase 2b randomized controlled study of ALTO-300, in each case as determined by the Administrative Agent in its sole discretion, (iii) a $7.5 million term loan facility (the “Third Tranche Term Loan”) available at the Company’s request between October 1, 2023 and March 1, 2024, subject to positive data from the Company’s Phase 2b randomized controlled study of ALTO-100 and positive data from the Company’s Phase 2b randomized controlled study of ALTO-300, in each case as determined by the Administrative Agent in its sole discretion, and (iv) a $10.0 million term loan facility (the “Fourth Tranche Term Loan”) available through January 1, 2025 at both the Lender’s and the Company’s option, subject to the Lender’s review of the Company’s financial and clinical information and operating plans and approval of the Lender’s investment committee. All four of these term loans have a maturity date of December 1, 2026. Based upon the terms of the Loan Agreement the Company could potentially access up to $10.0 million of the remaining $25.0 million of the credit facility.

Borrowings under all four term loan facilities bear interest at a variable annual rate equal to the greater of (i) 6.70% and (ii) the Prime Rate plus 1.20%. The Company is permitted to make interest-only payments on the First Tranche Term Loan for the first 24 months following the funding date. The interest-only period can be extended by an additional 12 months, subject to the funding of the Second Tranche Term Loan or the funding of the Third Tranche Term Loan and if the Company has completed equity sales of greater than $75.0 million prior to January 1, 2025, subject to certain conditions. In addition, each term loan funded also accrues a deferred interest amount equal to 1% annually of the outstanding principal, and becomes payable at the end of the 48-month term, or earlier in the instance of a repayment. The term of the combined facility will be 48 months, with repayment in monthly installments commencing at the end of the resulting interest-only period as outlined above through the end of the 48-month term.

The Company is obligated to pay a final fee equal to 6.25% of the aggregate amount of the term loans funded (“Exit Fee”) to occur upon the earliest of (i) the maturity date, (ii) the acceleration of the term loans, and (iii) the prepayment of the term loans. The Company has the option to prepay all, but not less than all, of the outstanding principal balance of the term loans under the Loan Agreement. If the Company prepays all of the term loans prior to the maturity date, it will pay the Lender a prepayment penalty fee based on a percentage of the outstanding principal balance, equal to 3% if the payment occurs on or before 24 months after the initial funding date, 2% if the prepayment occurs more than 24 months after, but on or before 36 months after the initial funding date, or 1% if the prepayment occurs more than 36 months after the initial funding date. The Company was also obligated to pay the Lender a one-time facility fee of $0.2 million (“Facility Fee”) on the initial closing date and will be obligated to pay a 0.7% fee on the amount of the Fourth Tranche Term Loan, if and when funded. The Exit Fee of $0.6 million and the Facility Fee of $0.2 million with respect to the First Tranche Term Loan were recorded as debt discount, and are being accreted using the effective interest method over the term of the First Tranche Term Loan within interest expense in the consolidated statements of operations and comprehensive loss.

The Lender may, at its option, elect to convert any portion of no more than $4.0 million of the then outstanding term loan amount and all accrued and unpaid interest thereon into shares of the Company’s preferred stock, or common stock at the Lender’s election, at a conversion price of the lesser of $17.86 per share and the price per share of the next round of stock in the Company’s next equity offering in which the Company receives at least $20.0 million of gross proceeds. The Company determined that the embedded conversion option is not required to be separated from the term loan as it qualifies for the derivative accounting scope exception since the preferred stock is not readily convertible to cash. In February 2024 the Company completed its IPO and the conversion option applies to the Company’s common stock (see Note 16).

The Company’s obligations under the Loan Agreement are secured by a first priority security interest in substantially all of its assets (with an exclusion for intellectual property). The Loan Agreement contains customary representations and warranties, and also includes customary events of default, including payment default, breach of covenants, change of control, and material adverse effects. The Loan Agreement restricts certain activities, such as disposing of the Company’s business or certain assets, incurring additional debt or liens or making payments on other debt, making certain investments and declaring dividends, acquiring or merging with another entity, engaging in transactions with affiliates or encumbering intellectual property, among others. There are no financial covenants associated with the Loan Agreement.

Upon the occurrence of an event of default, a default interest rate of an additional 5% per annum may be applied to the outstanding loan balances, and the Lender may declare all outstanding obligations immediately due and payable and exercise all of its rights and remedies as set forth in the Loan Agreement and under applicable law.

The Company recorded interest expense at a weighted average rate of 10.4% related to the Loan Agreement of $1.4 million for the year ended December 31, 2023. The Company recorded interest expense related to the Loan Agreement of less than $0.1 million for the year ended December 31, 2022.

Future principal debt payments and Exit Fee of the term loans funded as of December 31, 2023 are as follows (in thousands):

9. Asset Purchase and License Agreements

From time to time, the Company enters into asset purchase and license agreements with third parties. During the years ended December 31, 2023 and 2022, the Company was a party to the following significant agreements:

Stanford License Agreement

On December 6, 2019, the Company entered into a license agreement with the Board of Trustees of the Leland Stanford Junior University (“Stanford”) covering four inventions to guide treatment of psychiatry patients, some of which are jointly owned by other academic institutions but are exclusively managed by Stanford under certain invention management agreements between Stanford and the other institutions (the “Stanford License Agreement”). The Stanford License Agreement was subsequently amended in May 2020 and December 2023.

In connection with the Stanford License Agreement, as amended, the Company obtained an exclusive, worldwide, royalty-bearing license under certain patent rights in five patent families relating to brain stimulation, electroencephalogram and functional MRI that could be used to guide treatment of psychiatry patients (the “Stanford Licensed Patents”), and under certain technology relating to the inventions covered by the Stanford Licensed Patents (the “Stanford Licensed Technology”), to make, have made, use, sell, offer for sale and import licensed products for use in any indication. The Company's rights under the Stanford Licensed Patents are exclusive until December 2029, at which time it will become non-exclusive, and its rights under the Stanford Licensed Technology are non-exclusive. The Company may terminate the Stanford License Agreement at any time upon specified written notice to Stanford. Stanford may also terminate the agreement upon an uncured material breach of the agreement, including failure to achieved defined milestones related to the development and commercialization of the licensed products, as well as for certain other specified breaches.

As partial consideration to acquire these license rights, Alto paid a nominal upfront fee and reimbursed Stanford a nominal amount of prior patent prosecution expenses related to the licensed patents. Additionally, Alto is required to pay a low five-digit annual maintenance fee beginning on the first anniversary of the effective date through the term of the agreement. Alto also agreed to issue an aggregate of 71,370 shares of Alto’s common stock, or 1% of Alto’s equity on a fully-diluted basis, to Stanford and the other inventors. These shares were issued in April 2020. As additional consideration, the Company granted Stanford and the other inventors antidilution rights, whereby the Company agreed to maintain this collective equity ownership percentage at 1% until such time as the Company completed its initial qualified financing. In connection with this anti-dilution provision, Alto issued a further 32,978 shares of its common stock to Stanford and the other inventors in 2021. Following the initial closing of the Series A convertible preferred stock agreement, which met the definition of such qualified financing, the anti-dilution feature expired and no additional shares were issued.

In further consideration of the rights granted, beginning with the Company’s first commercial sale of the licensed products, the Company will also pay an annual earned royalty in the very low single digits on net sales of licensed products, subject to certain customary reductions. The Company is also required to pay Stanford mid-teen to low-mid double digit percentages of any sublicensing consideration that it receives from third parties to whom the Company sublicenses rights under the Stanford Licensed Patents, depending on the timing of entry into the applicable sublicense. The Company does not have any future milestone payment obligations to Stanford or the other inventors under the Stanford License Agreement other than costs related to maintenance of patents.

The fair value of the shares issued under the Stanford License Agreement was determined to be less than $0.1 million which was recorded as a research and development expense during 2019. The shares were issued in 2020 to settle the accrued liability, resulting in an increase in common stock and additional paid-in capital. The cost to acquire this license was expensed because the license relates to specific preclinical research and development activities that do not have an alternative future use. As the acquisition of the license was settled through the issuance of shares of the Company’s common stock, this transaction fell within the scope of ASC Topic 718 since equity was issued in exchange for goods (the license). Specifically, the Company recorded the cost of the license as a non-employee share based payment, measured at the grant date fair value of the common stock of $0.56 per share. The common shares were equity-classified. The anti-dilution provision was concluded to represent a performance condition tied to a future liquidity event, which was not considered probable of occurring at December 31, 2019 since it was deemed outside of the Company’s control. In 2021, after the performance condition was met, the Company issued an additional 32,978 shares, which resulted in an additional expense and corresponding increase to common stock and additional paid-in capital of a nominal amount.

Sanofi License Agreement

Effective May 18, 2021, the Company entered into an agreement with Sanofi to obtain an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain patent rights and know-how of Sanofi relating to a PDE4 inhibitor compound, now known as ALTO-101, to use, develop, manufacture, commercialize or otherwise exploit ALTO-101 and products incorporating ALTO-101 in all human therapeutic, prophylactic and diagnostic uses. The Company also acquired a worldwide non-exclusive license to use certain know-how licensed to Sanofi by a specified third party to exploit the licensed products solely with respect to Parkinson’s disease.

In exchange for the rights granted to the Company, the Company made a cash payment of $0.5 million which is recorded in research and development expenses during the year ended December 31, 2021 in the consolidated statements of operations and comprehensive loss since the acquired license does not have an alternative future use. The Company is obligated to pay Sanofi up to an aggregate amount in the low-mid double digit millions upon the completion of a combination of development and regulatory approval milestones. If the Company achieves regulatory approval for one or more licensed products, the Company will owe Sanofi certain commercial milestone payments for the achievement of specified levels of aggregate, annual worldwide net sales of all licensed products, up to an aggregate amount of $102.0 million. In addition, if the Company grants sublicenses under the patents and know how licensed to the Company under the agreement, the Company will be required to pay sublicense revenue to Sanofi at tiered percentages ranging from low-mid double-digit percentages down to the very low double-digit percentages, reducing based on the time of entry into the applicable sublicense agreement. No additional milestones were paid or accrued during the years ended December 31, 2023 or 2022 related to this agreement.

In further consideration of the rights granted, beginning with the Company’s first commercial sale of the licensed products, the Company will also pay an annual tiered earned royalty ranging from the mid-to-high single digits on net sales of licensed products, subject to certain customary reductions and a customary royalty floor. Royalties are payable, on a licensed products-by-licensed products and a country-by-country basis, until the latest to occur of (a) expiration of the last valid claim of a licensed patent covering such licensed products in such country, (b) the expiration of any regulatory exclusivity for such licensed products in such country, and (c) the 10th anniversary of the first commercial sale of such licensed product in such country. In addition, if the Company uses specified know-how licensed to Sanofi by the specified third party to exploit the licensed products for Parkinson’s disease, the Company will be required pay an additional premium at a mid-single digit percentage on all fees, milestone payments and royalties payable by the Company to Sanofi under the agreement.

Unless terminated earlier, the license agreement with Sanofi will expire with respect to each licensed product, on a country-by-country basis, upon the expiration of the royalty term set forth above, and with respect to the agreement in its entirety upon the expiry of the royalty term for the last licensed product for which there has been a first commercial sale. Either the Company or Sanofi may terminate the Sanofi Agreement upon written notice for the uncured material breach of the other party. Sanofi also has the right to terminate the agreement for the Company’s insolvency or if the Company brings or otherwise participates in a patent challenge against any licensed patents. The Company may terminate the agreement for any reason upon specified prior written notice to Sanofi.

Cerecor License Agreement

Effective May 28, 2021, the Company entered into an agreement with Cerecor Inc. (n/k/a Avalo Therapeutics, Inc.) (“Cerecor”) to obtain an exclusive, worldwide, royalty-bearing license, with the right to grant sublicenses, under certain patent rights and know-how owned or controlled by Cerecor, relating to an NR2B inhibitor compound now known as ALTO-202, including certain rights licensed to Cerecor by Essex Chemie AG, or Merck, to research, develop, make, have made, use, import, offer for sale and sell ALTO-202 and products incorporating ALTO-202 (“Cerecor Licensed Products”), for the prevention, diagnosis and/or treatment of all diseases in humans.

In exchange for the rights granted to the Company, the Company made a cash payment of $0.5 million, which is recorded in research and development expenses during the year ended December 31, 2021 in the consolidated statements of operations and comprehensive loss since the acquired license does not have an alternative future use. The Company is obligated to make aggregate cash payments of up to $59.1 million per Cerecor Licensed Product if the Company achieves certain development, regulatory approval, and first commercial sale milestones for such Cerecor Licensed Product in up to a specified number of indications. If the Company successfully commercializes Cerecor Licensed Products, it will also be required to pay to Merck sales milestones totaling up to $15.0 million for all Cerecor Licensed Products, for the achievement of certain specified levels of worldwide annual aggregate net sales of all Cerecor Licensed Products. No additional milestones were paid or accrued during the years ended December 31, 2023 or 2022 related to this agreement.

In further consideration of the rights granted, beginning with the Company’s first commercial sale of the licensed products, the Company will also pay an annual tiered earned royalty in the high single digits in the aggregate on net sales of licensed products. Royalties are payable, on a licensed products-by-licensed products and a country-by-country basis, until the later of the expiration of the last valid claim of a licensed patent covering such licensed products in such country or 10 years after the first commercial sale of such licensed product in such country. If the Company develops and commercializes a companion diagnostic as a standalone product in connection with a licensed product, the Company will be required to make a one-time milestone payment to Cerecor upon the achievement of a specified level of net sales of such companion diagnostic product, at an amount in the very low single digit millions.

The license agreement with Cerecor will terminate upon the expiration of the royalty term set forth above. Either the Company or Cerecor may terminate the Cerecor license agreement upon written notice for an uncured material breach of the other party, or in the case of an insolvency event of the other party. The Company may terminate the agreement for any reason upon specified prior written notice to Cerecor.

Teva Asset Purchase Agreement

Effective October 4, 2021, the Company entered into an agreement with Teva Pharmaceutical Industries, Ltd to acquire patents, know-how and other rights to ALTO-203 and a specified related compound (the “Teva Acquired Compound”), and assumed all post-acquisition liabilities related thereto.

In exchange for the rights granted to the Company, the Company made a cash payment of $0.5 million which is recorded in research and development expenses during the year ended December 31, 2021 in the consolidated statements of operations and comprehensive loss since the acquired license does not have an alternative future use. The Company is obligated to make aggregate cash payments of up to $27.0 million upon the achievement of certain development and regulatory approval milestones, and up to $35.0 million in the aggregate for the achievement of certain tiered sales milestones for any product that incorporates a Teva Acquired Compound. No additional milestones were paid or accrued during the years ended December 31, 2023 or 2022 related to this agreement.

In further consideration of the rights granted, beginning with the Company’s first commercial sale of the acquired compound(s), the Company will also pay an annual tiered earned royalty ranging from the mid-single-digits to 10 percent on net sales of acquired products. Royalties are payable, on a product-by-product and a country-by-country basis, until the latest to occur of (a) expiration of the last valid claim of an acquired patent covering such acquired products in such country, (b) the expiration of new chemical entity data and/or market exclusivity for such acquired products in such country or (c) the 10th anniversary of the date of first commercial sale of such acquired product in such country.

Palisade Asset Purchase Agreement

Effective October 18, 2021, the Company entered into an agreement with Palisade Bio, Inc. (“Palisade”) to acquire all patent, know-how and other rights to ALTO-100.

In exchange for the rights granted to the Company, the Company made a cash payment of $0.5 million which is recorded in research and development expenses during the year ended December 31, 2021 in the consolidated statements of operations and comprehensive loss since the acquired license does not have an alternative future use. The Company is obligated to make aggregate cash payments of up to $4.5 million upon the achievement of certain development and regulatory approval milestones. In connection with the sale or license by the Company to a third party of any of the patent, know-how or other rights included in the acquired assets prior to the achievement of a specified clinical development milestone, the Company will be required to pay to Palisade a low-double digit percentage of any consideration received by the Company from such license or sale, provided that the maximum aggregate consideration the Company will be required to pay to Palisade under the Palisade Agreement, including the upfront payment and all potential milestones and transaction-related payments, will not exceed $5.0 million. No additional milestones were paid or accrued during the years ended December 31, 2023 or 2022 related to this agreement.

MedRx License Agreement

On September 25, 2023, the Company entered into a joint development and license agreement (the “MedRx Agreement”) with MedRx Co., Ltd. (“MedRx”), pursuant to which the Company obtained an exclusive, sublicensable, worldwide license, with the right to sublicense, under certain patent rights and know-how of MedRx relating to transdermal drug delivery to develop (excluding any pre-clinical development), manufacture, and commercialize transdermally delivered pharmaceutical products comprising MedRx’s transdermal patch technology and the Company’s ALTO-101 (the “MedRx Licensed Products”) for all therapeutic, prophylactic, and diagnostic uses. The Company granted MedRx an exclusive, sublicensable, worldwide license under certain patent rights and know-how relating to ALTO-101 owned or controlled by the Company, including certain patents and know how licensed to the Company pursuant to the Sanofi Agreement, solely to conduct pre-clinical development and manufacturing of the MedRx Licensed Products for the Company in accordance with the MedRx Agreement and a separate manufacturing and supply agreement to be entered into between the Company and MedRx. During the term of the MedRx Agreement, the Company agreed that it will not, directly or indirectly, develop, manufacture, or commercialize any pharmaceutical product that is a transdermal patch formulation containing similar active pharmaceutical ingredients as ALTO-101 and that is used in the same field and labeled for the same indications as the MedRx Licensed Products (“MedRx Competitive Product”). MedRx agreed that it will not, directly or indirectly, exploit any patch formulations of PDE4-inhibitor drugs for use within central nervous system disorders or exploit any MedRx Competitive Product, provided that if certain specified development or first commercial sale milestones are not achieved by certain specified dates, then MedRx has the right to cause the non-compete restrictions on both parties to lapse.

Under the MedRx Agreement, MedRx will be solely responsible for conducting all pre-clinical development of MedRx Licensed Products to support IND and institutional review board filing, and the Company will be solely responsible for all other development (including non-clinical studies and clinical studies) necessary to obtain regulatory approval for MedRx Licensed Products and subsequent commercialization of Products. The Company is obligated to use commercially reasonable efforts to commercialize MedRx Licensed Products in each of the following countries in which the Company has obtained regulatory approval: the United States; at least two of Germany, Spain, France, Italy or the United Kingdom; and one of China or Japan.

Pursuant to the MedRx Agreement, the Company paid MedRx an upfront fee of less than $0.2 million, which was recorded within research and development expenses during the year ended December 31, 2023 in the consolidated statements of operations and comprehensive loss since the acquired license does not have an alternative future use.

The Company is required to pay MedRx up to an aggregate of $11.0 million for the achievement of certain development and first commercial sale milestones for the first MedRx Licensed Product to achieve such milestones with respect to a first indication, and an additional milestone in the mid single digit millions for each additional approved distinct indication for such first MedRx Licensed Product or a subsequent MedRx Licensed Product. In addition, the Company will be required to pay MedRx sales milestones based on the achievement of specified thresholds of aggregate annual worldwide net sales of all Licensed Products of up to $110.0 million in the aggregate, if all such sales thresholds are achieved. Commencing on the first commercial sale of a MedRx Licensed Product, the Company will also be obligated to pay MedRx a mid-single digit royalty on annual, worldwide net sales of all MedRx Licensed Products, subject to certain customary reductions and a royalty floor. Royalties will be payable, on a MedRx Licensed Product-by-MedRx Licensed Product and country-by-country basis, until the latest to occur of (a) expiration of the last valid claim of certain specified patent rights covering such MedRx Licensed Products in such country, (b) the expiration of any regulatory exclusivity for such MedRx Licensed Product in such country, (c) the first approval of a specified generic product referencing such MedRx Licensed Product in such country, and (d) the tenth anniversary of the first commercial sale of such MedRx Licensed Product in such country, or the Royalty Term.

The MedRx Agreement will expire with respect to each MedRx Licensed Product, on a country-by-country basis, upon the expiration of the Royalty Term, and with respect to the entire MedRx Agreement upon the expiry of the last-to-expire Royalty Term for the last MedRx Licensed Product for which there has been a first commercial sale. Either the Company or MedRx may terminate the MedRx Agreement in its entirety or on a MedRx Licensed Product-by-MedRx Licensed Product basis upon an uncured material breach by the other party or in connection with an insolvency event of such party. In addition, if the Company or MedRx bring or otherwise participate in a patent challenge against any patents licensed by the other party, such other party may terminate the MedRx Agreement immediately. The Company has the right to terminate the MedRx Agreement in its entirety or on a MedRx Licensed Product-by-MedRx Licensed Product basis for any reason upon specified prior written notice to MedRx provided that the effective date of such termination will not be earlier than the completion date of a specified development event. The Company also has the right to terminate the MedRx Agreement with respect to a MedRx Licensed Product immediately upon its reasonable determination of a material safety issue with respect to such MedRx Licensed Product. No additional milestones or royalties were paid or accrued during the year ended December 31, 2023 related to this agreement.

10. Stock Based Plans

The Company’s Board adopted the 2019 Equity Incentive Plan in March 2019 (as amended, the “2019 Plan”) to provide for the issuance of shares of common stock pursuant to stock options, stock appreciation rights, stock purchase rights, restricted stock agreements, and long-term performance awards granted to key employees, directors, and consultants of the Company. The total number of shares originally authorized to be issued under the 2019 Plan was 2,030,972. In April 2022, the Board approved an increase to the number of shares authorized to be issued under the 2019 Plan to 4,078,285. As of December 31, 2023 and 2022, there were 251,450 and 985,806 shares of common stock, respectively, reserved and available for issuance under the 2019 Plan.

Stock Options

The options have a 10-year life and generally vest over a period of four years, with the first 25% of the award vesting after one year and then monthly thereafter, subject to continuous service. Once the options are exercised, the shares are subject to transfer restrictions under the terms of the Company’s amended and restated certificate of incorporation.

The fair value of each option award is estimated using the Black-Scholes option-pricing model which involves the use of certain subjective assumptions. These assumptions and estimates are as follows:

Fair Value of Common Stock. As the Company’s common stock was not publicly traded prior to its IPO, the fair value was determined by the Board, with input from management and valuation reports prepared by independent third-party valuation firms.

Risk-Free Interest Rate. The risk-free interest rate for the expected term of the options was based on the U.S. Treasury yield curve in effect at the time of the grant.

Expected Term. The expected term of options represents the period of time that options are expected to be outstanding. The Company’s historical stock option exercise experience does not provide a reasonable basis upon which to estimate an expected term due to a lack of sufficient data. The Company estimated the expected term by using the simplified method, using the average of the time-to-vesting and the contractual life of the options.

Expected Volatility. As the Company does not have sufficient trading history to estimate the volatility of its common stock, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in the Company’s industry which are either similar in size, stage of life cycle, or financial leverage, over a period equivalent to the expected term of the awards, where available.

Expected Dividend Yield. The Company has never declared or paid any cash dividends and do not presently plan to declare or pay cash dividends in the foreseeable future. As a result, an expected dividend yield of zero percent was used.

The weighted-average grant date fair value of options granted during 2023 and 2022 for awards subject only to service-based vesting conditions were $4.85 and $5.39 per share, respectively, which were based on the following weighted-average assumptions:

The table below summarizes activity related to stock options subject only to service-based vesting conditions (dollars in thousands, except per share amounts):

As of December 31, 2023, there was approximately $8.4 million of unrecognized stock-based compensation expense related to these service-based unvested stock options which is expected to be recognized over a weighted-average period of 3.0 years.

Performance Option Awards

The Board granted options to purchase common stock to certain employees and consultants that vest upon the achievement of certain performance conditions (“Performance Awards”), such as the completion of a future financing event or upon the achievement of defined clinical milestones or outcomes. During the years ended December 31, 2023 and 2022, the Company issued 194,835 and 202,329 Performance Awards with an exercise price of $5.30 and $7.06 per share, respectively. The Performance Awards have a contractual term of ten years. The aggregate grant date fair value of these Performance Awards granted during the years ended December 31, 2023 and 2022 is $0.9 million and $1.1 million, respectively.

During the years ended December 31, 2023 and 2022, financing and clinical milestones were met, which resulted in the vesting of 187,714 shares and 210,197 Performance Awards, respectively and the recognition of $0.9 million and $0.7 million of stock-based compensation expense, respectively. The unvested Performance Awards remain eligible for vesting based upon the completion of the Company’s IPO which was not considered probable of occurring as of December 31, 2023, pending approval by the Board. As of December 31, 2023, there were 592,748 Performance Awards still outstanding, with a weighted-average exercise price of $4.63 per share, of which 194,835 remain unvested. In the event that the performance condition is met, the Company expects to recognize approximately $0.9 million of stock-based compensation expense. The remaining contractual life of the Performance Awards was 9.0 years as of December 31, 2023. Subsequent to December 31, 2023, the Company closed its IPO and the performance condition was met (Note 16).

Stock-based Compensation Expense

Non-cash stock-based compensation expense recognized in the accompanying consolidated statements of operations and comprehensive loss for the years ended December 31, 2023 and 2022 was as follows (in thousands):

Restricted Stock Awards

In June 2020, the Company granted a restricted stock award of 202,329 common shares to the Company’s Chief Executive Officer with a grant date fair value per share of $0.58. The restricted stock award vests over four years, or upon a change in the control of the Company, subject to continued employment with the Company. In the event of a change in control, the unvested restricted stock award will be accelerated and fully vested immediately prior to the change in control. There are no performance-based features or market conditions associated with this award. The fair value of the restricted stock award is determined based on the number of restricted shares granted and the fair value of the Company’s stock on the date of grant. The Company issued this award in exchange for cash proceeds of approximately $0.1 million, which was representative of the fair value of the shares at the grant date, and therefore there was no stock-based compensation expense associated with this equity award. As of December 31, 2023 and 2022, there were 21,075 and 71,658 shares, respectively, of the CEO’s unvested restricted stock outstanding which vest monthly through June 2024.

11. Loss Per Share

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The Company’s unvested restricted common stock is not included in the determination of loss per share until the award vests. Diluted net loss per common share excludes the potential impact of the Company’s convertible preferred stock and warrants because their effect would be anti-dilutive due to the Company’s net loss. Since the Company had a net loss in each of the periods presented, basic and diluted net loss per common share are the same.

The following outstanding potentially dilutive common stock equivalents were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

12. Income Taxes

Provision for Income Taxes

There is no provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. In 2023 and 2022, substantially all of the Company’s net losses were generated in the United States.

The effective tax rate of the Company’s provision (benefit) for income taxes differs from the U.S. federal statutory rate as follows:

Deferred Tax Assets and Valuation Allowance

Deferred tax assets reflect the tax effects of net operating losses (“NOLs”), and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The most significant item of deferred tax assets is derived from the Company’s federal NOLs.

The most significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):

A valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized. The Company has established a valuation allowance to offset the gross deferred tax assets as of December 31, 2023 and 2022 due to the uncertainty of realizing future tax benefits from its NOL carryforwards and other deferred tax assets. The valuation allowance increased by $11.2 million and $8.7 million during the years ended December 31, 2023 and 2022, respectively.

At December 31, 2023, the Company had U.S. federal gross NOL carryforwards of approximately $24.8 million, state gross NOL carryforwards of $66.6 million, foreign gross NOL carryforwards of $2.3 million, and tax credit carryforwards of $2.1 million. State NOL carryforwards begin to expire in 2039 and tax credit carryforwards will begin to expire in 2042 with $0.3 million of tax credit carryforwards having no expiration. US federal and foreign gross NOL carryforwards have no expiration.

Pursuant to Section 382 of the Internal Revenue Code, certain substantial changes in the Company’s ownership may result in a limitation on the amount of NOL carryforwards and tax carryforwards that may be used in future years. Utilization of the NOL and tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. The Company has not completed a study to assess whether an ownership change has occurred, or whether there have been multiple ownership changes since its formation. There could also be additional ownership changes in the future, including as a result of the completion of the Company's IPO in February 2024, which may result in additional limitations on the utilization of NOL carryforwards and credits.

Examination of Tax Returns

The Company is subject to income taxes in the U.S. federal jurisdiction, various state and local jurisdictions and in one foreign tax jurisdiction. The Company’s tax years from inception through 2023 are subject to examination by the U.S., state, and foreign tax authorities due to the carryforward of unutilized NOLs and research and development credits. The Company is not currently under examination in any tax jurisdictions.

13. Common Stock, Convertible Preferred Stock and Preferred Stock Warrants

At December 31, 2023, convertible preferred stock consisted of the following (dollars in thousands, except per share amounts):

At December 31, 2022, convertible preferred stock consisted of the following (dollars in thousands, except per share amounts):

Series Seed Preferred Stock

On September 13, 2019, the Company entered into a purchase agreement, as amended, with a number of investors for a private placement of 3,708,682 shares of Series Seed Preferred Stock. The Series Seed Preferred Stock was sold at a price of $2.0822 per share for gross proceeds of $7.7 million. The shares were issued across multiple dates between late 2019 and early 2020 for the same price per share.

Series A Preferred Stock

On May 3, 2021, the Company entered into a purchase agreement (the “Series A Purchase Agreement”) with a number of investors for a private placement of 6,785,075 shares of Series A Preferred Stock. The Series A Preferred Stock was sold at a price of $4.6996 per share for gross proceeds of $31.9 million. The shares were issued across multiple dates starting on May 3, 2021 and ending on August 2, 2021 for the same price per share.

Series B Preferred Stock

On April 6, 2022, the Company entered into a purchase agreement, as amended, with a number of investors, including a majority investor party to the Series A Purchase Agreement, for a private placement of 3,512,787 shares of Series B Preferred Stock. The Series B Preferred Stock was sold at a price of $6.00 per share for gross proceeds of $21.1 million. Following the initial close of the Series B Preferred Stock, additional closings occurred throughout 2022 which resulted in the sale of an incremental 2,197,501 shares of Series B Preferred Stock at the same price per share for gross proceeds of $13.2 million. In January 2023, the Company sold 4,166,667 shares of Series B Preferred Stock to a new investor for gross proceeds of $25.0 million.

In January 2023, the Board approved a 1.1156 for 1 forward stock split of the Company’s issued and outstanding shares of Series B Preferred Stock, and a proportional adjustment to the existing conversion ratio, as well as the exercise price of the outstanding K2 Warrant. Accordingly, all Series B share and per share amounts for all periods presented in the financial statements have been adjusted retroactively, where applicable, to reflect this stock split and adjustment of the preferred stock conversion ratio.

Series C Preferred Stock

On November 20, 2023, the Company entered into a purchase agreement (the “Series C Purchase Agreement”), pursuant to which the Company sold 9,547,802 shares of Series C convertible preferred stock at a price of $4.7132 per share for gross proceeds of $45.0 million. The majority of investors that participated in the Series C Purchase Agreement were new investors.

In connection with the closing of the Series C Purchase Agreement, the Board authorized an increase to the number of authorized shares of common stock to 52,000,000.

Preferred Stock Provisions

Dividends

The holders of Series Seed Preferred Stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock (collectively, the “Preferred Stock”) are entitled to receive, on a pari passu basis, non-cumulative dividends, as adjusted for stock splits, dividends, reclassifications or the like, prior and in preference to any declaration or payment of any dividends to the holders of common stock, when and if declared by the Board, at a rate of 8% of the original issuance price per share per annum. No dividends have been declared by the Board or paid since inception.

Liquidation Preference

In the event of any volun tary or involuntary liquidation, dissolution or winding up of the Company, holders of Series C Preferred Stock are entitled to receive, prior and in preference to holders of Series B, Series A and Series Seed Preferred Stock and common stock, an amount equal to the greater of (i) their original issue price plus any declared and unpaid dividends or (ii) such amount per share as would have been payable had all shares of Series C Preferred Stock been converted into common stock immediately prior to such event. If upon occurrence of such an event, the assets and funds to be distributed among the holders of the Series C Preferred Stock are insufficient to permit the payment to such holders, the entire assets and funds of the Company legally available for distribution will be distributed ratably among the holders of the Series C Preferred Stock. After the payment in full to the holders of Series C Preferred Stock, the holders of Series B Preferred Stock are entitled to receive, prior and in preference to holders of Series A and Seed Preferred Stock and common stock, an amount equal to the greater of (i) their original issue price plus any declared and unpaid dividends or (ii) such amount per share as would have been payable had all shares of Series B Preferred Stock been converted into common stock immediately prior to such event. After the payment in full to the holders of Series B Preferred Stock, the holders Series A Preferred Stock are entitled to receive, prior and in preference to holders of Series Seed Preferred Stock and common stock, an amount equal to the greater of (i) their original issue price plus any declared and unpaid dividends or (ii) such amount per share as would have been payable had all shares of Series A Preferred Stock been converted into common stock immediately prior to such event. After the payment in full to the holders of the Series A Preferred Stock, the holders of Series Seed Preferred Stock are entitled to receive, prior and in preference to holders of common stock, an amount equal to the greater of (i) their original issue price plus any declared and unpaid dividends or (ii) such amount per share as would have been payable had all shares of Series Seed Preferred Stock been converted into common stock immediately prior to such event. All remaining legally available assets of the Company that are not payable to the holders of shares of Preferred Stock shall be distributed among the holders of shares of common stock, pro rata based on the number of shares held by each such holder.

Conversion

At the option of the holder, each share of Preferred Stock is convertible into fully paid and non-assessable shares ofcommon stock as determined by dividing the original issuance price by the conversion price at the time in effect, subject to stock splits, stock dividends, and dilution. Each share of Preferred Stock automatically converts into the number of shares of common stock into which such shares are convertible at the then-applicable conversion ratio upon (i) the closing of the sale of shares of common stock in a public offering resulting in at least $50.0 million of gross proceeds and a share price of at least $13.64 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization), (ii) immediately prior to the consummation of a SPAC transaction in which the combined company, immediately following the closing of the SPAC transaction, holds at least $50.0 million in unrestricted cash, or (iii) the consent of at least a majority of the outstanding shares of Preferred Stock voting together as a single class and on an as-converted basis. Subsequent to December 31, 2023, the Company closed its IPO and all of the outstanding shares of preferred stock were converted into shares of the Company’s common stock (Note 16).

Voting Rights

Each holder of Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which each such shares of Preferred Stock could be converted on the record date for the vote or consent of the stockholders, except as otherwise required by law or other provisions of the Company’s amended and restated certificate of incorporation, and have voting rights and powers equal to the voting rights and powers of the common stockholders. The holders of record of Series C Preferred Stock, exclusively and as a separate class, are entitled to elect one director. The holders of record of Series B Preferred Stock, exclusively and as a separate class, are entitled to elect three directors to the Board. The holders of record of Series A Preferred Stock, exclusively and as a separate class, are entitled to elect one director to the Board. The holders of record of common stock, exclusively and as a separate class, are entitled to elect three directors to the Board. The holders of record of shares of Preferred Stock and common stock, exclusively and voting together as a single class and on an as-converted to common stock basis, are entitled to elect the remaining directors. Subsequent to December 31, 2023, the Company closed its IPO and all voting rights attributed to Preferred Stock have expired as the Company’s Preferred stock has been converted to shares to common stock (Note 16).

Protective Provisions

The holders of Preferred Stock have certain protective provisions as stipulated in the Company’s amended and restated certificate of incorporation. As long as at least 2,991,851 shares of Preferred Stock are outstanding, the Company cannot, without the approval of the majority of the holders of the then-outstanding shares of Preferred Stock, voting as a separate class, take any actions that, among others: (i) amends, alters or repeals any powers, preferences or rights of Preferred Stock; (ii) increases or decreases the authorized number of shares of Preferred Stock or common stock; (iii) purchases or redeems common stock; or (iv) declares or pays any dividends or distributions on the common stock.

Series A Preferred Stock Warrants

In May 2021, in connection with the closing of the Series A Preferred Stock Agreement, the Company issued warrants to the lead Series A investor to purchase an aggregate of 465,917 shares of Series A Preferred Stock (“Series A Preferred Stock Warrants”) at a price of $4.6996 per share (“Exercise Price”). The Series A Preferred Stock Warrants expire, and if not earlier exercised, will be automatically net exercised, on the earliest to occur of (i) the closing of a deemed liquidation event; (ii) the closing of the sale of shares of common stock in a public offering resulting in at least $75.0 million of gross proceeds and a share price of at least $15.68 per share (one and one half times the Exercise Price as adjusted by the reverse stock split discussed in Note 16); (iii) immediately prior to the consummation of a SPAC transaction in which the combined company, immediately following the closing of the SPAC transaction, holds at least $75.0 million in unrestricted cash; or (iv) May 3, 2026. The Company completed its IPO in February 2024 at $16.0 per share, resulting in a net exercise of the Series A Preferred Stock Warrants, see Note 16.

The Company determined the estimated fair value of the Series A Preferred Stock Warrants at the date of issuance to be $1.2 million, which was derived using weighted outcomes, akin to the probability weighted expected return method, and involved the use of two option pricing methods. Specifically, the Company considered the possibility of the following two scenarios: (1) a scenario where the Series A Preferred Stock Warrants are held until a qualifying IPO occurs, and (2) a scenario where the Series A Preferred Stock Warrants are held until maturity. This method is generally considered appropriate to use when there are several distinct exit scenarios that need to be considered. The significant assumptions used in the model for the Series A Preferred Stock Warrants issued in 2021 included the fair value of the Series A Preferred Stock, an expected life of between 2.9 and 5.0 years (dependent upon the probability-weighted scenario), a risk-free interest rate of 0.8%, and an expected volatility rate of 95%. The Company remeasured the fair value of the Series A Preferred Stock Warrants at December 31, 2021 using the same methodology and assumptions that closely approximated those as of its issue date. As of December 31, 2023, the Company remeasured the fair value of the Series A Preferred Stock Warrants and utilized an exit scenario that was not an IPO due to the market conditions at that time. The significant assumptions include an expected life of 3.3 years, a risk-free rate of 4.0% and an expected volatility of 100%. As of December 31, 2023, significant assumptions include an expected life of 2 years, a risk free rate of 4.5% and an expected volatility of 99%. The remeasured fair value of the Series A Preferred Stock Warrants as of December 31, 2023 and 2022 was $1.2 million and $1.7 million, respectively, resulting in a non-cash gain of $0.5 million and non-cash expense of $0.4 million thatwas recorded in the consolidated statements of operations and comprehensive loss during the years ended December 31, 2023 and 2022, respectively.

The Series A Preferred Stock Warrants are exercisable for up to a maximum of (i) half of the total number of Series A Preferred Stock Warrants originally underlying this warrant at the time when the Company issues any of its common stock or preferred stock, or an acquiring SPAC in a qualified SPAC transaction issues any of its common stock or share capital, in each case, at a price per share equal to or greater than two-and-one-half times (2.5x) the Exercise Price, and (ii) is exercisable with respect to the remaining half of the total number of the Series A Preferred Stock Warrants originally underlying this warrant at the time when the Company issues any of its common stock or preferred stock or an acquiring SPAC in a qualified SPAC transaction issues any of its common stock or share capital, in each case, at a price per share equal to or greater than three-and-one half times (3.5x) the Exercise Price.

Subsequent to December 31, 2023, the Company closed its IPO and all of the outstanding Series A Preferred Stock Warrants were net exercised and converted into shares of the Company’s common stock (Note 16).

K2 Warrant

In December 2022, in connection with the closing of the Loan Agreement, the Company issued a warrant to the Lender to purchase a number of shares of the Company’s Series B convertible preferred stock, or at Lender’s election, next round stock (“K2 Warrant”). The number of shares of convertible preferred stock issuable upon exercise of the warrant is equal to (a) (i) 0.0375, multiplied by (ii) the aggregate principal amount of term loans actually funded under the Loan Agreement, divided by (b) the warrant price then in effect. As of December 31, 2022, if exercised for Series B preferred stock, the exercise price is $6.00 per share, which would result in the issuance of an aggregate of 62,500 shares of Series B Preferred Stock. Following the sale and issuance of the Series C Preferred Stock Warrants in November 2023 which met the definition of a qualified financing of next round stock, the exercise price of the warrants is $4.7132 per share, which would result in the issuance of an aggregate of 79,564 shares of Series C Preferred Stock.

The K2 Warrant expires 10 years from the issue date of the Loan Agreement which is December 16, 2032. The Company is conditionally obligated to issue a fixed number of additional warrants (“Additional Warrants”) in the amount of 198,911 shares upon the funding of the Second, Third and Fourth Tranche Term Loans with the same exercise price and contractual term, assuming the warrants are exercisable for Series C Preferred Stock. The contingent obligation to issue the Additional Warrants did not meet the derivative scope exception or equity classification criteria and are accounted for as a derivative liability. The Company determined that the fair value of the contingently issuable Additional Warrants was de minimis at both the issuance date and also as of December 31, 2023. The K2 Warrant is exercisable in whole or in part from the time of issuance. Based upon the terms of the Loan Agreement, the Company could potentially access up to $10.0 million of the remaining $25.0 million of the credit facility. In addition, the Company completed its IPO in February 2024 and the K2 Warrant converted to a warrant to purchase a corresponding number of shares of the Company’s common stock.

The Company determined the estimated fair value of the K2 Warrant at the date of issuance to be $0.2 million, and utilized an exit scenario that was not an IPO due to the market conditions at that time. As of December 31, 2022, significant assumptions include an expected life of 3.3 years, a risk-free rate of 4.0% and an expected volatility of 100%. There were no changes to the fair value of the K2 Warrant between the issue date and December 31, 2022 given the very short passage of time. As of December 31, 2023, significant assumptions include an expected life of 2 years, a risk free rate of 4.5% and an expected volatility of 99%.

The following table summarizes the change in fair value of the preferred stock warrant liability, a Level 3 recurring fair value measurement, for the years ended December 31, 2023 and 2022 (in thousands):

Common Stock

As of December 31, 2023 and 2022, the Company had 52,000,000 and 36,200,000 authorized shares of common stock, respectively, with a par value of $0.0001 per share, of which 3,832,134 and 3,763,644 shares, respectively, were legally issued and outstanding.

As of December 31, 2023 and 2022, the Company had reserved common stock, on an as-if converted basis, for issuance as follows:

14. Commitments and Contingencies

From time to time, the Company is subject to occasional lawsuits, investigations and claims arising out of the normal conduct of business. The Company has no significant pending or threatened litigation as of December 31, 2023.

In the normal course of business, the Company enters into contracts that contain a variety of indemnifications with its employees, licensors, suppliers, and service providers. Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities. The Company’s maximum exposure under these arrangements is unknown at December 31, 2023. The Company does not anticipate recognizing any significant losses relating to these arrangements.

15. Retirement Plan

The Company has established a defined contribution 401(k) plan (the “401(k) Plan”) for the benefit of its employees. All of the full-time employees of the Company are eligible to participate in the 401(k) Plan which permits employees to make voluntary contributions up to the dollar limit allowed under the Internal Revenue Code. Beginning in January 2022, the 401(k) Plan also provides for matching contributions as defined by the Company of up to a combined total of 3% of an employee’s eligible annual compensation. The Company recorded matching contributions of $0.2 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively.

16. Subsequent Events

January 2024 Reverse Stock Split

In January 2024, the Board approved a 1 for 2.2241 reverse stock split of the Company’s issued and outstanding shares of common stock and options to purchase common stock under its 2019 Equity Incentive Plan. The reverse stock split reduced the number of shares of the Company’s issued and outstanding common stock, as well as the number of shares reserved and available for future issuance and underlying outstanding options to purchase common stock under its 2019 Equity Incentive Plan, on a 1-for-2.2241 basis, and resulted in an adjustment to the respective conversion ratios for the Company’s Series Seed convertible preferred stock, Series A convertible preferred stock, Series B convertible preferred stock, and Series C convertible preferred stock to account for the reverse stock split on any conversion of such series of convertible preferred stock into common stock. As such, all references to Series Seed convertible preferred stock, Series A convertible preferred stock, Series B convertible preferred stock, and Series C convertible preferred stock conversion ratios, conversion share and per share amounts, and post-conversion share and per share amounts, as well as common stock option, option per common share, common share and common per share amounts, in these consolidated financial statements and accompanying notes have been retroactively adjusted to reflect the reverse stock split and the reverse stock split’s effect on the respective Series Seed convertible preferred stock, Series A convertible preferred stock, Series B convertible preferred stock, and Series C convertible preferred stock conversion ratios for each series of convertible preferred stock. The reverse stock split did not affect the par values per share.

CIRM Grant to Support Development of ALTO-100 for Bipolar Depression

On January 25, 2024, the California Institute for Regenerative Medicine, or CIRM, held a meeting to determine a funding recommendation regarding a grant application the Company submitted to support a proposed Phase 2b clinical trial of ALTO-100 in patients with bipolar depression defined by the same cognitive biomarker being used for patient characterization in the ALTO-100 Phase 2b trial in patients with MDD. In the meeting, the Application Review Board for CIRM approved a funding award of $15.0 million to support the proposed clinical trial. As of January 25, 2024, the grant has been approved by CIRM for funding, subject to finalization and acceptance of requisite grant terms and conditions. As a result, timing of the funding of the grant has not yet been finalized. If the terms and conditions are finalized and accepted and the grant is funded, the Company intends to conduct a 200 patient Phase 2b trial in patients with bipolar depression characterized by the same cognitive biomarker as is being used in the ongoing ALTO-100 Phase 2b trial in patients with MDD.

Initial Public Offering

On February 6, 2024, the Company completed its IPO of its common stock pursuant to which the Company issued and sold 9,246,000 shares of common stock at a price to the public of $16.00 per share, which includes the exercise in full by the underwriters of their option to purchase 1,206,000 additional shares. The aggregate net proceeds from the IPO, inclusive of proceeds from the over-allotment exercise, were approximately $133.1 million after deducting underwriting discounts and commissions of $10.3 million and offering expenses of approximately $4.5 million. Upon completion of the IPO, all outstanding shares of Series Seed, Series A, Series B and Series C convertible preferred stock converted into an aggregate of 13,664,261 shares of common stock. In addition, the holders of all outstanding Series A preferred stock warrants net exercised their right to purchase shares of the Company's common stock, which resulted in the issuance of 72,631 shares of common stock at the time of the completion of the IPO. In connection with the closing of the IPO, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware and adopted amended and restated bylaws, both of which became effective immediately prior to the closing of the IPO.

Adoption of Equity Incentive Plan and Employee Stock Purchase Plan

In January 2024, the Board adopted, and the Company’s stockholders approved, the 2024 Equity Incentive Plan (the “2024 Plan”), which became effective on the execution of the underwriting agreement related to the IPO. Under the 2024 Plan, the Company may grant incentive stock options to employees, including employees of any parent or subsidiary, and nonstatutory stock options, stock appreciation rights, RSAs, restricted stock unit awards, performance awards and other forms of stock awards to employees, directors, and consultants, including employees and consultants of the Company’s affiliates. The 2024 Plan is a successor to the 2019 Plan. A total of 2,000,000 shares of common stock were approved to be initially reserved for issuance under the 2024 Plan. In addition, the number of shares of the Company’s common stock reserved for issuance under the 2024 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2025 and continuing through and including January 1, 2034, in an amount equal to 5% of the total number of shares of the Company’s common stock outstanding on the last day of the calendar month before the date of each automatic increase, or a lesser number of shares determined by the Board.

In January 2024, the Board adopted, and the Company’s stockholders approved, the 2024 Employee Stock Purchase Plan (the “ESPP”), which became effective on the execution of the underwriting agreement related to the IPO. A total of 250,000 shares of common stock were approved to be initially reserved for issuance under the ESPP. In addition, the number of shares of common stock reserved for issuance under the ESPP will automatically increase on January 1 of each calendar year, beginning on January 1, 2025 and continuing through, and including, January 1, 2034, by the lesser of (1) 1% of the total number of shares of the Company’s common stock outstanding on the last day of the calendar month before the date of the automatic increase, and (2) 750,000 shares; provided, that before the date of any such increase, the Board may determine that such increase will be less than the amount set forth in clauses (1) and (2).

Equity Grants

In February and March 2024, the Company granted options for the purchase of 1.1 million shares of common stock at a weighted-average exercise price of $15.36, which are expected to vest over 4 years, and 0.05 million restricted stock units which are expected to vest over 2 years.