1. Organization and Description of Business

Impel Neuropharma, Inc., or the Company, is a late-stage pharmaceutical company focused on the development and commercialization of transformative therapies for patients suffering from diseases with high unmet medical needs, with an initial focus on diseases of the central nervous system, or CNS. The Company’s strategy is to pair its proprietary Precision Olfactory Delivery, or POD, upper nasal delivery technology with well-understood therapeutics or other therapeutics where rapid vascular absorption is preferred to drive therapeutic benefit, improve patient outcomes, reduce drug development risk and expand the commercial opportunity within its target diseases. The Company was incorporated under the laws of the State of Delaware on July 24, 2008, maintains its headquarters and principal operations in Seattle, Washington, and performs certain of its research and development activities in Australia.

Initial Public Offering

On April 22, 2021, the Company’s Registration Statement on Form S-1 relating to its initial public offering, or IPO, was declared effective by the Securities and Exchange Commission, or the SEC, and the shares of its common stock began trading on the Nasdaq Global Select Market on April 23, 2021.  The IPO closed on April [27], 2021, pursuant to which the Company issued and sold 5,333,334 shares of its common stock at a public offering price of $15.00 per share. The Company received net proceeds of approximately [$71.4] million from the IPO, after deducting underwriting discounts and commissions of $5.6 million and offering costs of $3.0 million. Prior to the completion of the IPO, all shares of redeemable convertible preferred stock then outstanding were converted into 12,605,800 shares of common stock. In addition, the warrant held by Avenue Venture Opportunities Fund, L.P., or Avenue, was exchanged for 107,663 shares of common stock and warrants to purchase 1,987,348 shares of redeemable convertible preferred stock automatically converted into warrants to purchase 1,987,348 shares of common stock. Such warrants were then net exercised into 52,974 shares of common stock. The convertible notes issued in March 2021 for an aggregate principal amount of $7.5 million (see Note 6) were also converted into 559,585 shares of common stock at a 10% discount of the IPO price.

Reverse Stock Split

In April 2021, the Company’s board of directors and stockholders approved an amendment to the Company’s certificate of incorporation to effect a reverse split of shares of the Company’s common stock on an one-for-16.37332 basis, which was effected on April 16, 2021 (the “Reverse Stock Split”). The number of authorized shares and the par values of the common stock and redeemable convertible preferred stock were not adjusted as a result of the Reverse Stock Split. In connection with the Reverse Stock Split, the conversion ratio for the Company’s outstanding redeemable convertible preferred stock was proportionately adjusted such that the common stock issuable upon conversion of such preferred stock was decreased in proportion to the Reverse Stock Split. All references to common stock and options to purchase common stock share data, per share data and related information contained in the condensed consolidated financial statements have been retroactively adjusted to reflect the effect of the Reverse Stock Split for all periods presented.

Liquidity and Capital Resources

The Company raised $71.4 million in net proceeds from its IPO in April 2021 and from the Company’s inception through March 31, 2021, it raised an aggregate of $142.5 million in gross cash proceeds from the sale and issuance of redeemable convertible preferred stock, convertible notes, debt and warrants. The Company had a cash balance of $4.5 million as of March 31, 2021.

2. Summary of Significant Accounting Policies

In March 2021, the Company issued convertible promissory notes to various investors for an aggregate amount of $7.5 million. As permitted under Accounting Standards Codification ("ASC") 825, Financial Instruments ("ASC 825"), the Company has elected the fair value option for recognition of the convertible notes. The Company elected the fair value option to allow the Company to eliminate the burden of complying with the requirements for derivative accounting. Under the fair value option, the convertible notes are remeasured at fair value in each reporting period until their conversion in April 2021, with changes in the fair value recognized in the Company’s condensed consolidated statement of operations as other (expense) income, net. Accrued interest on the convertible notes is recorded in interest (expense) income, net.

3. Fair Value Measurements

The carrying value of the Company’s term loan (see Note 6) approximates the fair value as the term loan was recently issued in November 2020.

Fair values of the Company’s redeemable convertible preferred stock warrant liabilities and convertible notes are based on significant inputs not observed in the market, and thus represent a Level 3 measurement. Refer to Note 6 and Note 7 for the valuation techniques and assumptions used in estimating the fair value of the convertible notes and warrants, respectively.

4. Balance Sheet Components

5. Commitments and Contingencies

Operating Leases

The Company leases office and laboratory space in Seattle, Washington.

In September 2017, the Company entered into a non-cancelable operating lease for 11,256 square feet of office and laboratory space. Rent is payable monthly, increasing by approximately 3% each year. As of March 31, 2021, the remaining future minimum lease payments were $1.0 million through the expiration date of August 31, 2022.

Rent expense for the three months ended March 31, 2021 and 2020 was $174,000 and $150,000, respectively.

Legal Proceedings

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and that such expenditures can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount.

Indemnifications

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company intends to enter into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company currently has directors’ and officers’ insurance coverage that reduces its exposure and enables the Company to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

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COVID-19

In March 2020, the COVID-19 disease was declared a pandemic by the World Health Organization. Management continues to evaluate the potential impacts of the COVID-19 pandemic on the development of its product candidates, and business. The Company is working closely with its manufacturing vendors to maintain adequate product supply and with healthcare providers as future studies are planned to mitigate risk to patients while adhering to regulatory, institutional and government guidance and policies. The Company remains committed to its development plans and acknowledges the potential risk for delays in the product supply chain and in anticipated timelines for its preclinical studies and clinical trials.

6. Debt

Term Loan

On November 5, 2020 the Company entered into a debt and equity financing agreement with Avenue Venture Opportunities Fund, L.P., or Avenue. The agreement provides for a 36-month term loan of up to $20.0 million, of which $10.0 million was funded at close and (b) an additional $10.0 million is available at the Company’s request until December 31, 2021, subject to (i) completion of an underwritten public offering with gross proceeds of at least $75.0 million, or a Qualified Offering, (ii) receipt of FDA approval of TRUDHESA and (iii) approval by Avenue’s investment committee. The term loan bears interest at the higher of the prime rate or 11%.

Under the agreement, Avenue also has the right to invest up to $10.0 million in a private placement concurrent with an IPO (at the IPO price) or special purpose acquisition company, or SPAC, transaction (at the effective price per share), in each case, subject to mutual agreement and Avenue investment committee approval.

Payments for the term loan are interest only for the initial 12 months and can be extended to (i) 24 months upon achieving a qualified IPO with gross proceeds of at least $75.0 million or (ii) 36 months upon achieving the first interest only period extension and FDA approval of TRUDHESA. The term loan will amortize in equal payments of principal from the end of the interest only period to the expiration of the 36-month term on November 1, 2023 and includes a final payment of $450,000 due upon the maturity of the term loan. In connection with the agreement, the Company granted Avenue warrants for the purchase of shares of 1,762,810 shares of Series D redeemable convertible preferred stock, as disclosed in Note 7. Avenue is eligible to receive additional warrants upon the drawdown of the remaining $10.0 million under the agreement.

The Company’s obligations are secured by a security interest in substantially all of the Company’s assets, excluding the. Company’s intellectual property after completion of the Company’s IPO. The agreement contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, including on intellectual property, guaranties, mergers and consolidations, substantial asset sales, investments and loans, certain corporate changes, transactions with affiliates and fundamental changes. The agreement provides for events of default customary for term loans of this type, including but not limited to non-payment, breaches or defaults in the performance of covenants, insolvency and bankruptcy.

The net proceeds from the issuance of the term loan were initially allocated to the warrants at an amount equal to their fair value of $1.5 million and the remainder to the term loan. The Company incurred financing costs of $299,000 which, together with the fair value of the warrants and the final payment, are recorded as a debt discount and are being amortized over the contractual term using the effective interest method. During the three months ended March 31, 2021, the Company recorded interest expense of $491,000.

Convertible Promissory Notes

In March 2021, the Company issued unsecured convertible promissory notes to various investors for an aggregate amount of $7.5 million which are accounted for at fair value. The notes bear interest at a rate of 5.0% per annum and mature on the earlier of (a)

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December 31, 2021 and (b) a change of control. The notes are (i) automatically convertible into shares of the Company’s common stock upon the closing of a firm-commitment underwritten public offering, at a per share price of at least $1.0636, resulting in at least $50.0 million in net proceeds, or a Qualified Public Offering, or a SPAC transaction at 90% of the price per share in such transactions, (ii) convertible at the holder’s option or upon a change of control into shares of Series D redeemable convertible preferred stock at the Series D original issuance price, and (iii) convertible at the holder’s option upon a new redeemable convertible preferred stock financing into shares of redeemable preferred stock issued in such financing at 90% of the price per share.

The agreement contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, including on intellectual property, guaranties, mergers and consolidations, substantial asset sales, investments and loans, certain corporate changes, transactions with affiliates and fundamental changes. The agreement provides for events of default customary for term loans of this type, including but not limited to non-payment, breaches or defaults in the performance of covenants, insolvency and bankruptcy.

Accrued interest on the convertible notes totaled $27,000 during the three months ended March 31, 2021 and is recorded in interest (expense) income, net. On March 31, 2021, the notes were remeasured to their settlement amount at the IPO date excluding accrued interest due to the proximity of the settlement date to the end of the reporting period. The loss on the increase in fair value on the convertible notes totaled $839,000 from their issuance through March 31, 2021 and is classified as other (expense) income, net in the accompanying condensed consolidated statements of operations.

The carrying value of the convertible notes of $8.4 million immediately prior to the Company’s IPO subsequently converted into 559,585 shares of common stock upon completion of the IPO.

7. Redeemable Convertible Preferred Stock Warrant Liabilities

The fair value of the warrants was determined using an option pricing model. Under this model, the estimated equity value of the Company as of the measurement date is allocated to various classes of financial instruments (such as common and redeemable convertible preferred stock and warrants to purchase redeemable convertible preferred stock) based on their rights and preferences in an assumed liquidity scenario, which was estimated to occur in two years. Other assumptions used included stock volatility ranging from 46.4% to 103.0% during the three months ended March 31, 2021 and 46.0% to 64.1% during the three months ended March 31, 2020, and risk-free interest rates ranging from 0.04% to 0.24% during the three months ended March 31, 2021 and 0.15% to 2.81% during the three months ended March 31, 2020. In April 2021, upon completion of the IPO, the Series A-2 and C-1 redeemable convertible preferred stock warrants were net exercised into 52,974 shares of common stock. The Series D redeemable convertible preferred stock warrants were exchanged for 107,663 shares of common stock.

8. Redeemable Convertible Preferred Stock

Classification

The Company has classified its redeemable convertible preferred stock as mezzanine equity on the condensed consolidated balance sheets as the shares are contingently redeemable with passage of time or upon deemed liquidation events, such as a change in control. As only the passage of time is required for Series B, C-1, C-2, C-3, and D preferred stock to become redeemable, the Company is accreting the carrying value of the preferred stock shares to their redemption value, using the effective interest method, over the period from issuance to the earliest payment dates. With respect to Series A-1 and A-2, no accretion was recorded during the three months ended March 31, 2021 and 2020, as a deemed liquidation event was not probable. Amounts recorded for the accretion of redeemable convertible preferred stock during the three months ended March 31, 2021 and 2020 were $129,000 and $128,000, respectively. The accretion is recorded as a deemed dividend and a charge to additional paid-in capital.

In April 2021, immediately prior to the completion of the IPO (see Note 1), all outstanding shares of redeemable convertible preferred stock were automatically converted into 12,605,800 shares of common stock. Upon conversion into common stock, the carrying value of the redeemable convertible preferred stock of $127.2 million was reclassified to equity. 

9. Common Stock

Each share of common stock has the right to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors, subject to the prior rights of holders of all classes of stock outstanding having priority rights as to dividends. No cash dividends have been declared by the board of directors from inception.

10. Stock Incentive Plan

2008 Plan

In September 2008, the Company’s board of directors adopted the 2008 Stock Incentive Plan, or the 2008 Plan, which provides for the granting of incentive stock options, nonqualified stock options, and restricted stock awards to its employees, directors and consultants. Options granted or shares issued under the 2008 Plan that were outstanding on the date the 2018 Equity Incentive Plan, or the 2018 Plan, became effective will remain subject to the terms of the 2008 Plan. The 2008 Plan terminated in 2018 as it reached its ten-year term. New grants issued after the termination of the 2008 plan will be under the 2018 plan. At March 31, 2021 and December 31, 2020, options to purchase 627,285 and 634,788 shares, respectively, under the 2008 plan remained outstanding.

2018 Plan

In November 2018, the Company’s board of directors adopted the 2018 Equity Incentive Plan. The 2018 Plan provides for the granting of incentive stock options, nonqualified stock options, restricted stock units, and other forms of stock awards to its employees, directors and consultants.

The 2018 Plan is administered by the board of directors or a committee appointed by the board of directors, which determines the types of awards to be granted, including the number of shares subject to the awards, the exercise price and the vesting schedule. The exercise price of incentive stock options and nonqualified stock options will be no less than 100% of the fair value per share of the Company’s common stock on the date of grant. If an individual owns capital stock representing more than 10% of the voting shares and the grant is an incentive stock option, the price of each share will be at least 110% of the fair value on the date of grant. Options expire after 10 years (five years for incentive stock options granted to stockholders owning greater than 10% of the voting stock). The term and vesting periods for options granted under the 2018 Plan are determined by the Company’s board of directors or a committee appointed by the board of directors. Options granted generally vest over four years. Options must be exercised within a 10-year period or sooner if so specified within the option agreement. Under the 2018 Plan, the Company initially reserved 753,645 shares of common stock for issuance. In addition, any authorized shares not issued or subject to outstanding grants under the 2008 Plan and any shares

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subject to outstanding stock options that are cancelled without being exercised or expire under the 2008 Plan are added to the shares authorized and reserved for issuance under the 2018 Plan. At March 31, 2021 and December 31, 2020, options to purchase 2,082,425 and 1,807,101 shares, respectively, under 2018 Plan remained outstanding. The Company had 68,540 and 344,456 shares available for future grant under the 2018 Plan as of March 31, 2021 and December 31, 2020, respectively.

In May 2020, the Company’s board of directors increased the pool of stock options available for future grant by 596,414 shares and appointed an existing member of the board of directors as the Company’s Chief Executive Officer. In connection with this change, the Company granted 715,358 stock options to its Chief Executive Officer at an exercise price of $7.86 per share that will vest ratably over 48 months. Vesting of the Chief Executive Officer’s options accelerate upon a termination without cause. The Company recognized $2.1 million of expense related to a modification upon the acceleration of the former Chief Executive Officer’s outstanding options upon his departure from the Company.

The total intrinsic value of options exercised was $94,000 and $21,000 during the three months ended March 31, 2021 and 2020, respectively. The intrinsic value is the difference between the estimated fair value of the Company’s common stock at the time of exercise, as determined by the board of directors, and the exercise price of the stock option.

The total fair value of options that vested during the three months ended March 31, 2021 and 2020 was $367,000 and $434,000, respectively.

The grant date fair value of options granted during the three months ended March 31, 2021 and 2020 was $2.0 million and $0.7 million, respectively. The weighted-average grant date fair value of employee options granted during the three months ended March 31, 2021 and 2020 was $7.07 and $4.47 per share, respectively.

As of March 31, 2021, there was $6.9 million of total unrecognized compensation cost related to unvested options that are expected to vest. The cost is expected to be recognized over a weighted-average period of 3.0 years.

In determining the fair value of the stock options granted, the Company uses the Black-Scholes-Merton option-pricing model and assumptions discussed below. Each of these inputs is subjective.

Fair Value of Common Stock—Given the absence of a public trading market, the Company’s board of directors with input from management considered numerous objective and subjective factors to determine the fair value of common stock. The factors included,

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but were not limited to: (1) third-party valuations of the Company’s common stock; (2) the Company’s stage of development; (3) the status of research and development efforts; (4) the rights, preferences and privileges of the Company’s preferred stock relative to those of the Company’s common stock; (5) the Company’s operating results and financial condition, including the Company’s levels of available capital resources; and (6) equity market conditions affecting comparable public companies; (7) general U.S. market conditions; and (8) the lack of marketability of the Company’s common stock.

Expected Term—The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company used the simplified method (based on the mid-point between the vesting date and the end of the contractual term) to determine the expected term.

Expected Volatility—Since the Company is privately held and does not have any trading history for its common stock, the expected volatility was estimated based on the average historical volatilities for comparable publicly traded pharmaceutical companies over a period equal to the expected term of the stock option grants. The comparable companies were chosen based on their similar size, stage in the life cycle and area of specialty. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of option.

Expected Dividend—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.