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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended March 31, 2023

 

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

 

For the transition period from ___________ to ___________

 

GENELUX CORPORATION

(Exact name of registrant as specified in its charter)

 

 Delaware   001-41599   77-0583529

(State or other jurisdiction of

incorporation or organization)

 

Commission

File Number

 

(IRS Employee

Identification No.)

 

2625 Townsgate Road, Suite 230, Westlake Village, California 91361

(Address of Principal Executive Offices)

 

 

 

(805) 267-9889

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

 

 

Title of each class registered:   Trading symbol:   Name of each exchange on which registered:
Common Stock, par value $0.001 per share   GNLX  

The Nasdaq Stock Market LLC

(Nasdaq Capital Market)

 

Securities registered under Section 12(g) of the Exchange Act: None

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

 

Large Accelerated Filer ☐

Accelerated Filer ☐

 

 

Non-Accelerated Filer

Smaller Reporting Company

    Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No

 

The number of shares issued and outstanding of each of the issuer’s classes of common equity as of May 11, 2023 was 24,665,298.

 

 

 

 
 

 

GENELUX CORPORATION

FORM 10-Q

MARCH 31, 2023

TABLE OF CONTENTS

 

PART I— FINANCIAL INFORMATION  
     
Item 1. Condensed Financial Statements 3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 3 Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Control and Procedures 32
     
PART II— OTHER INFORMATION  
     
Item 1 Legal Proceedings 33
Item 1A Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 100
Item 3. Defaults Upon Senior Securities 101
Item 4. Mine Safety Disclosures 101
Item 5. Other Information 101
Item 6. Exhibits 101
     
SIGNATURES 102

 

2
 

 

Genelux Corporation

Condensed Balance Sheets

(In thousands, except for share amounts and par value data)

 

   March 31,   December 31, 
   2023   2022 
   (Unaudited)     
ASSETS          
Current Assets          
Cash  $10,338   $397 
Prepaid expenses and other current assets   1,718    1,495 
Total Current Assets   12,056    1,892 
           
Property and equipment, net   617    644 
Right of use asset   1,851    1,335 
Deferred offering costs   -    1,568 
Other assets   92    92 
Total Other Assets   2,560    3,639 
           
TOTAL ASSETS  $14,616   $5,531 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities          
Accounts payable and accrued expenses  $5,292   $6,775 
Accrued compensation   2,910    2,852 
Accrued interest payable   -    1,178 
Accrued interest payable - director and shareholders   108    3,817 
Deferred revenue   -    170 
Warrant liabilities   -    169 
Lease liability, current portion   568    266 
Notes payable - shareholders, net of debt discount of $108 in 2022   1,600    992 
Convertible notes payable - shareholders, current portion, including $65 and $105 past due, respectively   65    15,407 
Total Current Liabilities   10,543    31,626 
           
Long-term Liabilities          
Lease liability, long-term portion   1,382    1,164 
Convertible notes payable, net of debt discount of $541 in 2022   -    8,524 
Total Long-term Liabilities   1,382    9,688 
           
Total Liabilities   11,925    41,314 
           
Shareholders’ Equity (Deficit)          
Preferred stock, Series A through K, par value $0.001, 29,927,994 shares authorized; no shares and 22,094,889 shares issued and outstanding, respectively;   -    22 
Common stock, par value $0.001, 75,000,000 shares authorized; 24,553,470 and 9,126,726 shares issued and outstanding, respectively   25    9 
Treasury stock, 433,333 shares, at cost   (433)   (433)
Additional paid-in capital   206,688    154,401 
Accumulated other comprehensive income   2    2 
Accumulated deficit   (203,591)   (189,784)
Total Shareholders’ Equity (Deficit)   2,691    (35,783)
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)  $14,616   $5,531 

 

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

 

3
 

 

Genelux Corporation

Condensed Statements of Operations

(in thousands, except for share amounts and per share data)

 

   2023   2022 
   Three Months Ended 
   March 31, 
   2023   2022 
   (Unaudited) 
         
Revenues  $170   $- 
           
Operating expenses:          
Research and development   2,845    2,369 
General and administrative   3,787    1,095 
Total operating expenses   6,632    3,464 
           
Loss from operations   (6,462)   (3,464)
           
Other expenses:          
Interest expense   (143)   (288)
Debt discount amortization   (649)   (49)
Financing costs   (3,110)   - 
Total other expenses   (3,902)   (337)
           
NET LOSS  $(10,364)  $(3,801)
           
BASIC AND DILUTED LOSS PER COMMON SHARE  $(0.53)  $(0.42)
           
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING -          
BASIC AND DILUTED   19,575,631    9,110,376 

 

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

 

4
 

 

Genelux Corporation

Condensed Statements of Cash Flows

(In thousands)

 

   2023   2022 
   Three Months Ended 
   March 31, 
   2023   2022 
   (Unaudited) 
Cash Flows from Operating Activities          
Net loss  $(10,364)  $(3,801)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   136    138 
Right-of-use asset   118    102 
Amortization of debt discount   649    49 
Stock compensation   227    372 
Fair value of restricted stock units   198    - 
Cost of stock option repricing   2,606    - 
Fair value of warrants issued in connection with the conversion of convertible notes payable   3,110    - 
Changes in Assets and Liabilities          
(Increase) Decrease in:          
Prepaid expenses and other assets   (223)   377 
(Decrease) Increase in:          
Accounts payable and accrued expenses   (913)   7 
Accrued compensation   58    59 
Accrued interest payable   92    142 
Deferred revenue   (170)   5,460 
Lease liability   (114)   (80)
Net cash provided by (used in) operating activities   (4,590)   2,825 
           
Cash Flows from Investing Activities          
Purchases of property and equipment   (109)   (15)
Net cash used in investing activities   (109)   (15)
           
Cash Flows from Financing Activities          
Proceeds from notes payable - shareholders   900    - 
Repayment of notes payable - shareholders   (460)   - 
Repayment of convertible notes payable - shareholders   -    (130)
Payment of deferred offering costs   (303)   - 
Proceeds from common stock issued for cash in connection with the closing of the IPO   14,503    - 
Net cash provided by (used in) financing activities   14,640    (130)
           
Net increase in cash   9,941    2,680 
           
Cash beginning of period   397    4,495 
Cash end of period  $10,338   $7,175 
           
Supplemental cash flows disclosures:          
Interest paid  $50   $146 
Taxes paid  $-   $- 
           
Supplemental non-cash financing disclosures:          
Extension of right-of-use asset and operating lease  $649   $- 
Reclassification of deferred offering costs to shareholders’ equity  $1,871   $- 
Reclassification of warrant liabilities to shareholders’ equity  $169   $- 
Conversion of convertible notes payable, accrued interest and loan fees to shareholders’ equity  $29,896   $- 
Conversion of preferred stock to common stock  $22   $- 
Conversion of dividends payable to shareholders’ equity  $3,443   $- 

 

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

 

5
 

 

Genelux Corporation

Condensed Statements of Shareholders’ Equity (Deficit) (Unaudited)

(in thousands, except share amounts)

 

   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Income   Deficit   Total 
                               Accumulated         
   Preferred Stock                   Additional   Other         
   Series A through K   Common Stock   Treasury Stock   Paid-in   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Income   Deficit   Total 
                                         
Balance, December 31, 2021   22,094,889   $22    9,110,060   $9    433,333   $(433)  $151,866   $           2   $(184,577)  $(33,111)
                                                   
Stock compensation   -    -    -    -    -    -    372    -    -    372 
                                                   
Net loss during the three months ended March 31, 2022   -    -    -    -    -    -    -    -    (3,801)   (3,801)
                                                   
Balance, March 31, 2022 (unaudited)   22,094,889   $22    9,110,060   $9    433,333   $(433)  $152,238   $2   $(188,378)  $(36,540)
                                                   
Balance, December 31, 2022   22,094,889   $22    9,126,726   $9    (433,333)  $(433)  $154,401   $2   $(189,784)  $(35,783)
                                                   
Stock compensation   -    -    -    -    -    -    227    -    -    227 
                                                   
Issuance of common shares upon the closing of the initial public offering, net of offering costs   -    -    2,653,000    3    -    -    12,629    -    -    12,632 
                                                   
Issuance of common shares upon conversion of preferred stock   (22,094,889)   (22)   8,355,610    8    -    -    14    -    -    - 
                                                   
Issuance of common shares upon conversion of convertible notes payable, accrued interest and loan fees   -    -    4,134,367    5    -    -    29,891    -    -    29,896 
                                                   
Issuance of common shares upon conversion of preferred stock dividends payable   -         272,101    -    -    -    3,443    -    (3,443)   - 
                                                   
Fair value of vested restricted stock units   -    -    -    -    -    -    198    -    -    198 
                                                   
Cost of stock option repricing   -    -    -    -    -    -    2,606    -    -    2,606 
                                                   
Reclassification of warrant liabilities upon the closing of the initial public offering   -    -    -    -    -    -    169    -    -    169 
                                                   
Fair value of warrants issued in connection with the conversion of convertible notes payable   -    -    -    -    -    -    3,110    -    -    3,110 
                                                   
Shares issued upon cashless exercise of stock warrant   -    -    11,666    -    -    -    -    -    -    - 
                                                   
Net loss during the three months ended March 31, 2023   -    -    -    -    -    -    -    -    (10,364)   (10,364)
                                                   
Balance, March 31, 2023 (unaudited)   -   $-    24,553,470   $25    (433,333)  $(433)  $206,688   $2   $(203,591)  $2,691 

 

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

 

6
 

 

GENELUX CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(In thousands, except for share amounts and per share data)

 

NOTE 1 – BASIS OF PRESENTATION

 

Organization and Operations

 

Genelux Corporation (“Genelux” or the “Company”), a Delaware Corporation, incorporated on September 4, 2001, is a biomedical company located in Westlake Village, California. The Company is engaged in the research and development of diagnostic and therapeutic solutions for cancer for which there is no effective treatment today. The Company is focused on the development of therapeutic approaches for cancer that are designed to generate a personalized multi-prong attack to overwhelm a tumor’s sophisticated defense mechanisms.

 

Basis of Presentation of Unaudited Financial Information

 

The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

 

COVID-19 Considerations

 

During the three months ended March 31, 2023, the COVID-19 pandemic did not have a material net impact on our operating results, but did have an impact on our supply chain. In response to the COVID-19 pandemic, a number of governmental orders and other public health guidance measures have been implemented across much of the United States, including in the locations of our office, clinical trial sites and third parties on whom we rely.

 

Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the onset of the COVID-19 pandemic, we maintained the consistency of our operations. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations. We anticipate that our clinical development timelines could be negatively affected by COVID-19, which could materially and adversely affect our business, financial condition and results of operations.

 

Through March 31, 2023, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. During the three months ended March 31, 2023, the Company generated cash flows primarily through the closing of its initial public offering of its common stock (“IPO”) to meet its short-term liquidity needs, but it expects to maintain access to other potential loans and equity financings, when needed, and potentially future payments under existing and new licensing agreements. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.

 

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company incurred a net loss of $10,364 and used cash in operations of $4,590 during the three months ended March 31, 2023, and had an accumulated deficit of $203,591 as of March 31, 2023. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

7
 

 

In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2022 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

At March 31, 2023, the Company had cash on hand in the amount of $10,338. The ability to continue as a going concern is dependent on the Company attaining and maintaining profitable operations in the future and raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due. Since inception, the Company has funded its operations primarily through equity and debt financings, and licensing income, and it expects to continue to rely on these sources of capital in the future.

 

During the three months ended March 31, 2023, the Company closed its IPO and received net proceeds of $12,632. On May 12, 2023, the Company entered into a Securities Purchase Agreement with certain investors pursuant to which the Company agreed to sell and issue 1,665,213 shares of its Common Stock in a private placement transaction, or the Private Placement. The purchase price per share of Common Stock is $20.00 per share. The initial closing of the Private Placement is expected to occur on or before May 19, 2023, or the Initial Closing, subject to customary closing conditions. The total gross proceeds to the Company at the Initial Closing from the Private Placement are expected to be approximately $33,300, including approximately $1,500 from the cancellation of certain of the Company’s bridge loans and accrued interest (see Note 6). Two of the Purchasers will, and are contractually obligated to, fund up to $15,000 of such Purchasers’ investment amounts following the Initial Closing but no later than November 15, 2023. The Company expects our cash on hand at March 31, 2023, together with the proceeds from the Private Placement, will last until the first quarter of 2025.

 

No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case of equity financing, or grant unfavorable terms in licensing future licensing agreements.

 

Reverse Stock Split

 

In August 2022, the Company effected a 1-for-3 reverse stock split of its common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The reverse stock split resulted in an adjustment to the conversion prices of the convertible preferred stock to reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods presented.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in the valuation of accruals for potential liabilities, valuations of stock-based compensation, and realization of deferred tax assets, among others. Actual results could differ from these estimates.

 

Income (Loss) Per Share

 

Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding common shares during the period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued.

 

8
 

 

For the three months ended March 31, 2023 and 2022, the basic and diluted shares outstanding were the same, as potentially dilutive shares were considered anti-dilutive. The potentially dilutive securities consisted of the following:

 

   March 31,
2023
   March 31,
2022
 
Convertible notes payable   -    3,312,696 
Common stock equivalent of Series A through K convertible preferred stock   -    8,558,947 
Stock options   4,201,019    3,962,074 
Stock warrants   1,034,979    823,129 
Restricted stock units   113,500    - 
Stock warrants, issuable in connection with conversion of notes payable   69,893    183,852 
           
Total   5,419,391    16,840,698 

 

Revenue Recognition

 

The Company records revenue under the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606) which requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.

 

The Company determines revenue recognition through the following steps:

 

  Identification of the contract, or contracts, with a customer

 

  Identification of the performance obligations in the contract

 

  Determination of the transaction price

 

  Allocation of the transaction price to the performance obligations in the contract

 

  Recognition of revenue when, or as, we satisfy a performance obligation.

 

Under certain of the Company’s licensing, supply and collaboration agreements, it is entitled to receive payment upon the achievement of contingent milestone events or the performance of obligations. The Company recognizes revenue based on guidance in ASC 606. In evaluating revenue recognition under a license agreement, the Company uses a two-step process for determining whether a promised good or service (including a license of intellectual property) is distinct and, therefore, is a performance obligation: (1) consideration of the individual good or service (i.e., whether the good or service is capable of being distinct); and (2) consideration of whether the good or service is separately identifiable from other promises in the contract (i.e., whether the promise to transfer the good or service is distinct in the context of the contract). Amounts received prior to satisfying the revenue recognition criteria are recorded as deferred revenue on the Company’s balance sheet. Amounts expected to be recognized as revenue in the next 12 months following the balance sheet date are classified as current liabilities.

 

During the year ended December 31, 2022, the Company, under its Newsoara agreement, invoiced and collected $170 relating to supplying product for Newsoara to use in their clinical trials. As the product did not ship during the year ended December 31, 2022, the Company recorded the cash received as deferred revenue until the product was shipped. During the three months ended March 31, 2023, the Company shipped the product to Newsoara and thus recognized the revenue.

 

9
 

 

Deferred Offering Costs

 

The Company capitalizes certain legal, professional, accounting and other third-party fees that are directly associated with in-process equity issuances as deferred offering costs until such equity issuances are consummated. After consummation of the equity issuance, these costs are recorded as a reduction in the capitalized amount associated with the equity issuance. Should the equity issuance be delayed or abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the Statement of Operations. As of December 31, 2022, the Company incurred $1,568 of deferred offering costs related to the Company’s IPO, and during the three months ended March 31, 2023, the Company incurred an additional $303 of costs. During the three months ended March 31, 2023, a total of $1,871 of deferred offering costs were recorded against the net proceeds received from the IPO.

 

Fair Value of Financial Instruments

 

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

 

  Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

  Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The carrying amount of the Company’s warrant liabilities of $169 at December 31, 2022 was based on Level 3 measurements. The carrying amounts of financial instruments such as cash, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments. The carrying amounts of the Company’s convertible notes payable approximate their fair values as the interest rates of the notes payable are based on prevailing market rates.

 

Stock-Based Compensation

 

The Company measures all stock options and other stock-based awards granted based on the fair value of the award on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The Company has elected to recognize forfeitures as they occur. The reversal of compensation cost previously recognized for an award that is forfeited because of a failure to satisfy a service or performance condition is recognized in the period of the forfeiture. Generally, the Company issues stock options with only service-based vesting conditions and records the expense for these awards using the straight-line method over the requisite service period.

 

The Company classifies stock-based compensation expense in its statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.

 

The Company was a private company until the completion of its IPO on January 30, 2023. In 2022 and prior, the Company estimated the fair value of common stock using an appropriate valuation methodology, in accordance with the framework of the American Institute of Certified Public Accountants’ Technical Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation. Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, guideline public company information, the prices at which the Company sold its common stock to third parties in arms’ length transactions, the rights and preferences of securities senior to the Company’s common stock at the time, and the likelihood of achieving a liquidity event such as an initial public offering or sale. Significant changes to the assumptions used in the valuations could result in different fair values of stock options at each valuation date, as applicable.

 

10
 

 

The fair value of each stock option grant is estimated using the Black-Scholes option-pricing model. The Company was a private company and lacked company-specific historical and implied volatility information. Therefore, it estimated its expected stock volatility based on the historical volatility of a publicly traded set of peer companies within the biotechnology industry with characteristics similar to the Company. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. 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.

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses—Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard is effective for the Company beginning January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial position, results of operations, and cash flows.

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. An issuer measures the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange. ASU 2021-04 introduces a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. The adoption of ASU 2021-04 did not have a material impact on the Company’s financial statements or disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at March 31, 2023 and December 31, 2022:

 

   March 31,
2023
   December 31,
2022
 
Furniture and office equipment  $148   $148 
Laboratory equipment   2,762    2,762 
Computer equipment   127    127 
Leasehold improvements   557    557 
Construction-in-progress   109    - 
           
Property and equipment, gross   3,703    3,594 
Less: accumulated depreciation and amortization   (3,086)   (2,950)
           
Property and equipment, net  $617   $644 

 

11
 

 

Depreciation expense for the three months ended March 31, 2023 and 2022 was $136 and $138, respectively.

 

NOTE 4 – ACCRUED COMPENSATION

 

As of March 31, 2023 and December 31, 2022, the Company had accrued compensation owed to the Company’s Chief Executive Officer, another employee and two former employees that had accrued over a several year period. As of March 31, 2023 and December 31, 2022, a total of $2,910 and $2,852, respectively, was owed to employees for these past due balances and for current accrued payroll and other compensation related benefits.

 

NOTE 5 – LEASE LIABILITIES

 

Operating Leases

 

The Company accounts for leases in accordance with ASC 842, which requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease initially measured at the present value of the lease payments. In July 2018, the Company entered into a long-term non-cancellable lease agreement for its manufacturing facility that requires aggregate average monthly payments of $10 beginning October 2018. The lease terminates in September 2023, with a Company option to extend for an additional five years. The Company classified the lease as an operating lease and determined that the value of the right of use asset and lease liability at the adoption date was $518 and $519, respectively, using a discount rate of 4.00%. Effective April 2022, the Company extended the lease for the additional five-year period, with no changes to any of the other terms of the lease, and has the option to extend the lease for an additional five years. Prior to the extension, the remaining lease liability amounted to $174. On the date of the extension, the Company determined that the value of the new right of use asset and lease liability was $860, respectively, using a discount rate of 4.00%. As such, the Company recorded an increase in lease liability of $686 as a result of the lease extension.

 

In December 2020, the Company entered into a long-term non-cancellable lease agreement for a laboratory facility that requires aggregate average monthly payments of $18 beginning January 2021. The lease terminates in February 2023. The Company classified the lease as an operating lease and determined that the value of the right of use asset and lease liability at the adoption date was $439, respectively, using a discount rate of 4.00%. Effective February 2023, the Company extended the lease through December 2024, with no changes to any of the other terms of the lease. The average monthly rent payment on the extended lease is approximately $30 per month. Prior to the extension, the remaining lease liability amounted to $12. On the date of the extension, the Company determined that the value of the new right of use asset and lease liability was $649, respectively, using a discount rate of 5.5%. As such, the Company recorded an increase in lease liability of $637 as a result of the lease extension.

 

In July 2021, the Company entered into a long-term non-cancellable lease agreement for its new corporate headquarters that requires aggregate average monthly payments of $10 beginning August 2021. The lease terminates in July 2027. The Company classified the lease as an operating lease and determined that the value of the right of use asset and lease liability at the adoption date was $656, respectively, using a discount rate of 4.00%.

 

During the three months ended March 31, 2023 and 2022, the Company made combined aggregate payments of $114 and $80, respectively, towards the lease liabilities. As of March 31, 2023 and December 31, 2022, the combined lease liability amounted to $1,950 and $1,164, respectively.

 

ASC 842 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. During the three months ended March 31, 2023 and 2022, the Company reflected combined amortization of the right of use assets of $118 and $102, respectively, related to the leases, resulting in a combined net asset balance of $1,851 and $1,335 as of March 31, 2023 and December 31, 2022, respectively.

 

12
 

 

Other Leases

 

In November 2019, the Company entered into a short-term lease agreement for one of its office facilities, extending the lease until December 2020, and in October 2020, it was extended until December 2021. In November 2021, it was extended again for one year until December 2022. The lease for this facility is currently on a month-to-month basis. Rent expense was $9 during the three months ended March 31, 2023 and 2022, respectively.

 

NOTE 6 – NOTES PAYABLE – SHAREHOLDERS

 

During the year ended December 31, 2022, the Company, in anticipation of closing its IPO, entered into note payable agreements with several shareholders totaling $1,100. The notes accrue interest at 12% per annum, are unsecured and are due at the earlier of June 15, 2023 or the month after the closing of the IPO. As of December 31, 2022, the outstanding principal and accrued and unpaid interest balances on the notes were $1,100 and $5, respectively.

 

During the three months ended March 31, 2023, the Company extended the due date on the notes until April 30, 2023. During the three months ended March 31, 2023, the Company borrowed an additional $900 from its shareholders and repaid $400 of principal and $1 of interest. The notes accrued interest of $47 during the three-month period. As of March 31, 2023, the outstanding principal and accrued and unpaid interest balances on the notes were $1,600 and $51, respectively.

 

In consideration for the notes, the Company issued the note holders stock warrants to purchase up to an aggregate total of 44,441 shares of its common stock with an exercise price per share equal to 90% of the IPO price, or $5.40 per share, based on the IPO closing price (see Note 9). The issuance of the warrants was contingent upon the closing of the IPO, and as such, were not formally granted until the closing of the IPO in January 2023. The warrants expire in December 2025. The Company determined the warrants should be accounted for as a liability on the date of issuance. The Company calculated the fair value of the warrants issued to the noteholders to be $169 using a Black Scholes option pricing model with the following assumptions:

 

     
Exercise price  $6.00 
Expected dividends    
Expected volatility   96.0%
Risk free interest rate   3.50%
Life of the warrants   3.0 

 

The Company recognized a liability and recorded a debt discount at the date of issuance in the amount of $169. The Company recorded the fair value of the warrants as warrant liabilities as of December 31, 2022. The notes’ discounts are being amortized over the term of the notes and the unamortized portion is recognized as a reduction to the carrying amount of the notes (a valuation debt discount). During the year ended December 31, 2022, the Company amortized $61 of debt discount, leaving an unamortized balance of $108 at December 31, 2022. During the three months ended March 31, 2023, the Company amortized $108 of debt discount, leaving no unamortized balance at March 31, 2023.

 

NOTE 7 – CONVERTIBLE NOTES PAYABLE – SHAREHOLDERS

 

Convertible notes payable to shareholders consisted of the following as of March 31, 2023 and December 31, 2022:

 

   March 31,
2023
   December 31,
2022
 
Convertible notes payable - shareholders (a)  $65   $7,838 
Convertible note payable - shareholder (b)       1,500 
Convertible notes payable – shareholders (c)       700 
Convertible notes payable - shareholders (d)       5,369 
           
Convertible notes payable - shareholders   65    15,407 
Less: current portion   (65)   (15,407)
           
Convertible notes payable – shareholders – long - term portion  $   $ 

 

(a) During the years ended December 31, 2011 through 2016, the Company entered into convertible note payable agreements with individuals aggregating to a total amount of $7,988. The notes initially accrued interest at 8% per annum, are unsecured and are convertible into the Company’s Series K preferred stock at $25.73 per share.

 

13
 

 

  As of December 31, 2022, the principal amount due on the notes aggregated to $7,838 and total accrued and unpaid interest of $2,890 was owed on the notes. During the three months ended March 31, 2023, $60 of principal and $36 of accrued and unpaid interest were paid on the notes, and the notes accrued interest of $13. On January 30, 2023, the date of the closing of the IPO, total principal of $7,778 and total accrued and unpaid interest of $2,867 was owed on the notes.
   
  Upon the closing of the IPO, all of the principal plus accrued and unpaid interest, except for $65 of principal and $58 of accrued and unpaid interest, automatically converted into 1,554,814 shares of the Company’s common stock based on the conversion price of $6.78 per share.
   
  As of March 31, 2023, total principal of $65 and total accrued and unpaid interest of $58 was owed on the notes. The notes accrue interest at 8% per annum, are unsecured and are past due and payable on demand.

 

(b)

In April 2016, the Company entered into a convertible note payable agreement with a shareholder in the amount of $2,661. The note accrued interest at 11.51% per annum, was unsecured, had an initial maturity date of May 2018 and was convertible into the Company’s common stock at the price of $6.78 per share. Interest payments are due monthly. In May 2018, the note was amended to include a provision under which the loan will accrue $10 per month of loan fees through the date the loan is repaid or is converted into the Company’s common stock. The loan fees can be converted into shares of the Company’s common stock at $6.78 per share.

 

As of December 31, 2022, total principal of $1,500 and total accrued and unpaid loan fees of $560 was owed on the note. During the three months ended March 31, 2023, the note accrued loan fees of $10, and on January 30, 2023, the date of the closing of the IPO, total principal of $1,500 and total accrued and unpaid loan fees of $570 was owed on the notes.

 

Upon the closing of the IPO, all of the principal plus accrued and unpaid loan fees automatically converted into 303,835 shares of the Company’s common stock based on the conversion price of $6.78. As of March 31, 2023, no principal, interest or loan fees was due on the notes. Subsequent to March 31, 2023, the Company may issue the shareholder a stock warrant to purchase up to 55,310 shares of the Company’s common stock at an exercise price of $9.00 (see Note 9).

 

(c)

In April 2018, the Company entered into two convertible note payable agreements with a shareholder under which the Company borrowed an aggregate total of $700. The notes accrue interest at 5.0% per annum, are unsecured, and are convertible into the Company’s common stock at the lesser of $12.00 per share, or 90% of the Company’s IPO price, if it were to occur. The agreements contain a provision that in the case the shareholder converts the notes into shares of the Company’s common stock, the shareholder will receive a warrant to purchase up to 25% of the shares converted, at the exercise price of $10.50 per share. The warrant, if issued, will expire three years from the date of grant.

 

As of December 31, 2022, total principal of $700 and total accrued and unpaid interest of $164 was owed on the notes. During the three months ended March 31, 2023, the notes accrued interest of $3, and on January 30, 2023, the date of the closing of the IPO, total principal of $700 and total accrued and unpaid interest of $167 was owed on the notes.

 

Upon the closing of the IPO, all of the principal plus accrued and unpaid interest automatically converted into 160,563 shares of the Company’s common stock based on the conversion price of $5.40, which was 90% of the IPO closing price. As of March 31, 2023, no principal or interest was due on the notes. Subsequent to March 31, 2023, the Company may issue the shareholder a stock warrant to purchase up to 14,583 shares of the Company’s common stock at an exercise price of $10.50 (see Note 9).

 

14
 

 

(d)

During the years ended December 31, 2019 through 2021, the Company entered into convertible note payable agreements with several shareholders under which the Company borrowed an aggregate amount of $5,369. The notes accrue interest at 5.0% per annum, are unsecured, and are convertible into the Company’s common stock at the price of $12.00 per share, or 90% of the Company’s IPO price, if it were to occur. The agreements also contain a provision that in the case a shareholder converts the notes into shares of the Company’s common stock, the shareholder will receive a warrant to purchase up to 25% of the shares converted, at the exercise price of $10.50 per share. The warrants, if issued, will expire three years from the date of grant.

 

As of December 31, 2022, total principal of $5,369 and total accrued and unpaid interest of $758 was owed on the notes. During the three months ended March 31, 2023, the notes accrued interest of $22, and on January 30, 2023, the date of the closing of the IPO, total principal of $5,369 and total accrued and unpaid interest of $780 was owed on the notes.

 

Upon the closing of the IPO, all of the principal plus accrued and unpaid interest automatically converted into 1,134,063 shares of the Company’s common stock based on the conversion price of $5.40, which was 90% of the IPO closing price. As of March 31, 2023, no principal or interest was due on the notes. During the three months ended March 31, 2023, the Company issued the shareholders additional stock warrants to purchase up to 111,828 shares of the Company’s common stock at an exercise price of $10.50 (see Note 11).

 

NOTE 8 – CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following as of March 31, 2023 and December 31, 2022:

 

   March 31,
2023
   December 31,
2022
 
Convertible note payable  $   $9,065 
Less: debt discount       (541)
           
Convertible notes payable, net  $   $8,524 

 

During the years ended December 31, 2020 and 2021, the Company entered into convertible note payable agreements with an investing group under which the Company borrowed an aggregate amount of $9,065. The notes accrue interest at 6.0% per annum, are unsecured, and are convertible into the Company’s common stock at the price of $10.50 per share. In consideration for the notes, the Company issued the noteholder stock warrants to purchase up to 146,641 shares of its common stock with an exercise price of $10.50 per share. The warrants expire in September 2025.

 

As of December 31, 2022, the Company owed $9,065 of principal on the notes and $1,178 of accrued and unpaid interest. During the three months ended March 31, 2023, the notes accrued interest of $45, and on January 30, 2023, the date of the closing of the IPO, total principal of $9,065 and total accrued and unpaid interest of $1,223 was owed on the notes.

 

The Company calculated the relative fair value of the warrants issued to the noteholder and recognized a debt discount at the date of issuance. The note discount is being amortized over the term of the note and the unamortized portion is recognized as a reduction to the carrying amount of the note (a valuation debt discount). As of December 31, 2022, the notes had an unamortized debt discount balance of $541. During the three months ended March 31, 2023, the Company amortized $541 of debt discount, leaving no unamortized balance at March 31, 2023.

 

15
 

 

Upon the closing of the IPO, all of the principal plus accrued and unpaid interest automatically converted into 979,619 shares of the Company’s common stock based on the conversion price of $10.50 per share. As of March 31, 2023, no principal or interest was due on the notes.

 

NOTE 9 - SHAREHOLDERS’ EQUITY

 

Preferred Stock

 

As of December 31, 2022, authorized shares and shares issued and outstanding of the Company’s preferred stock by series were as follows:

 

   Authorized
Shares
   Issued and
Outstanding
   Par
Value
 
Series A Preferred Stock   4,500,000    4,500,000    4,500 
Series B Preferred Stock   608,000    608,000    608 
Series C Preferred Stock   5,000,000    5,000,000    5,000 
Series D Preferred Stock   3,000,000    3,000,000    3,000 
Series E Preferred Stock   1,591,994    1,591,994    1,592 
Series F Preferred Stock   953,000    953,000    953 
Series H Preferred Stock   5,000,000    536,000    536 
Series I Preferred Stock   2,775,000    2,757,442    2,757 
Series J Preferred Stock   2,500,000    1,281,600    1,282 
Series K Preferred Stock   4,000,000    1,866,853    1,867 
                
Total   29,927,994    22,094,889    22,095 

 

Upon the closing of the Company’s IPO on January 30, 2023, all of the Company’s 22,094,889 outstanding shares of Series A through Series K preferred stock automatically converted into 8,355,610 shares of common stock, of which 991,172 shares were attributable to conversion price adjustments based on a weighted-average anti-dilution formula.

 

As of January 30, 2023, earned but undeclared and unpaid Series H dividends were $3,443. Upon the closing of the IPO, the unpaid dividends were automatically converted into 272,101 shares of the Company’s common stock.

 

Common Stock

 

Authorized shares

 

The Company’s Certificate of Incorporation authorizes the Company to issue up to 75,000,000 of its common shares. Holders of shares of common stock have full voting rights, one vote for each share held of record. Shareholders are entitled to receive dividends as may be declared by the Board out of funds legally available therefore and share pro rata in any distributions to shareholders upon liquidation. Shareholders have no conversion, pre-emptive or subscription rights. All outstanding shares of common stock are fully paid and non-assessable. As of March 31, 2023 and December 31 2022, there were 24,553,470 and 9,126,726 shares of common stock issued and outstanding, respectively.

 

16
 

 

Common Stock Issued for Cash Upon Closing of the Company’s IPO

 

On January 30, 2023, the Company completed its IPO of its common stock in which the Company issued and sold 2,500,000 shares of its common stock at a public offering price of $6.00 per share. In February 2023, the Company sold an additional 153,000 shares of common stock at $6.00 per share pursuant to the underwriters’ partial exercise of their option to purchase additional shares of common stock. The total gross proceeds of the IPO were $15,918 and the Company raised $12,632 in net proceeds after deducting underwriting discounts and commissions and offering expenses payable by the Company.

 

Adoption of Equity Incentive Plan and Employee Stock Purchase Plan

 

In June 2022, the Board of Directors adopted the 2022 Equity Incentive Plan (the “2022 Plan”). The stockholders approved the 2022 Plan in August 2022, and it became effective upon its approval by the Company’s stockholders, but no grants could be made under the 2022 Plan until immediately prior to the execution of the underwriting agreement related to the IPO. Under the 2022 Plan, the Company may grant incentive stock options to employees, including employees of any parent or subsidiary, and nonstatutory stock options, stock appreciation rights, restricted stock awards, 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 2022 Plan is a successor to the 2019 Plan. A total of 2,800,000 shares of common stock were approved to be initially reserved for issuance under the 2022 Plan. In addition, the number of shares of the Company’s common stock reserved for issuance under the 2022 Plan will automatically increase on January 1 of each calendar year, starting on January 1, 2024 and continuing through and including January 1, 2032, 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 Company’s Board of Directors.

 

In June 2022, the Board of Directors adopted the 2022 Employee Stock Purchase Plan (the “ESPP”). The stockholders approved the ESPP in August 2022, and it became effective immediately prior to the execution of the underwriting agreement for the IPO. A total of 770,000 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, 2024 and continuing through, and including, January 1, 2032, 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) 2,100,000 shares; provided, that before the date of any such increase, the Company’s Board of Directors may determine that such increase will be less than the amount set forth in clauses (1) and (2).

 

Grant of Restricted Stock Units (RSU)

 

The following table summarizes restricted common stock activity during the three months ended March 31, 2023:

 

  

Number of

Restricted

Shares

   Fair Value  

Weighted

Average

Grant Date

Fair Value

 
             
Non-vested, December 31, 2022   -   $-   $- 
Granted   113,500    746    6.57 
Vested   -    (198)   6.57 
Forfeited   -    -    - 
Non-vested, March 31, 2023   113,500   $548   $6.57 

 

On February 17, 2023, the Company’s Board of Directors approved the issuance of a combined total of 113,500 restricted shares of the Company’s common stock to certain of its officers, directors and consultants. All of the shares vest on July 25, 2023. The fair value of the shares on the date of grant was $746. As the RSU shares vest in July 2023, no common shares were issued during the three months ended March 31, 2023. The RSU shares were granted under the Company’s 2022 Equity Incentive Plan.

 

17
 

 

During the three months ended March 31, 2023, the Company recorded $198 of stock compensation for the fair value vesting of restricted common stock and as of March 31, 2023, unamortized compensation of $548 remained that will be amortized over the remaining vesting period, through July 2023.

 

Stock Options

 

In August 2009, the Company’s Board of Directors approved the adoption of the 2009 Equity Incentive Plan (“the 2009 Plan”). The 2009 Plan was initiated to encourage and enable employees, directors and consultants of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. A total of 6,166,666 of the authorized shares of the Company’s common stock may be subject to, or issued pursuant to, the terms of the plan. As of March 31, 2023 and December 31, 2022, no shares were available for grant under the 2009 plan.

 

In September 2018, the Company’s Board of Directors approved the adoption of the 2019 Equity Incentive Plan (“the 2019 Plan”). The 2019 Plan was initiated to encourage and enable employees, directors and consultants of the Company to acquire and retain a proprietary interest in the Company by ownership of its common stock. The 2019 Plan allows for the following types of awards: (i) Incentive Stock Options; (ii) Nonstatutory Stock Options; (iii) Stock Appreciation Rights; (iv) Restricted Stock Awards; (v) Restricted Stock Unit Awards; (vi) Other Stock Awards. The maximum number of shares of our common stock that may be issued under our 2019 Plan is 2,059,073 shares. Outstanding stock awards granted under the 2009 Plan that (i) expire or terminate for any reason prior to exercise or settlement; (ii) are forfeited because of failure to meet a contingency or condition required to vest such shares or otherwise return to us; or (iii) are required or withheld (or not issued) to satisfy a tax withholding obligation in connection with an award or to satisfy the purchase price or exercise price of a stock award can be added to the authorized shares as Returning Shares, not to exceed 3,774,260 shares. The maximum number of shares of our common stock under our 2019 Plan that may be issued is 5,833,333 shares. As of March 31, 2023, a total of 1,632,314 shares were available for grant under the 2019 plan, and a total of 2,800,000 were available for grant under the 2022 plan.

 

Option exercise prices are set forth in the Grant Notice, without commission or other charge, provided however, that the price per share of the shares subject to the option shall not be less than the greater of (i) 100% of the fair market value of a share of stock on the grant date, or (ii) 110% of the fair market value of a share of stock on the grant date in the case of a Participant then owning more than 10% of the total combined voting power of all classes of stock of the Company or any “subsidiary corporation” of the Company or any “parent corporation” of the Company. Options to employees, directors and consultants generally vest and become exercisable over a period not exceeding four years. Options typically expire ten years after date of grant.

 

The Company’s policy is to recognize compensation cost for awards with only service conditions on a straight- line basis over the requisite service period for the entire award. Additionally, the Company’s policy is to issue new shares of common stock to satisfy stock option exercises. The Company applied fair value accounting for all share-based payments awards. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model.

 

The table below summarizes the Company’s stock option activities for the three months ended March 31, 2023:

 

   Number of
Option Shares
   Exercise
Price Range
Per Share
   Weighted Average
Exercise Price
 
             
Balance, December 31, 2022   4,201,019   $6.00 - 10.50   $6.09 
Granted            
Cancelled            
Exercised            
Expired            
                
Balance, March 31, 2023   4,201,019   $6.00 - 10.50   $6.09 
              09 
Vested and exercisable, March 31, 2023   4,012,963   $6.00 - 10.50   $6.26 
                
Unvested, March 31, 2023   188,056   $6.00   $6.00 

 

18
 

 

The following table summarizes information concerning outstanding and exercisable options as of March 31, 2023:

 

    Options Outstanding   Options Exercisable 
Range of Exercise Prices   Number
Outstanding
   Average
Remaining
Contractual Life
(in years)
   Weighted
Average
Exercise Price
   Number
Exercisable
   Average
Remaining
Contractual
Life (in years)
   Weighted
Average
Exercise Price
 
$6.00    4,092,887    5.28   $6.00    3,904,831    5.11   $6.00 
 9.00 - 10.50    108,132    4.80    9.67    108,132    4.80    9.67 
$6.00 - 10.50    4,201,019    5.27   $6.09    4,012,963    5.11   $6.26 

 

In September 2022, the Company’s board of directors approved a stock option repricing whereby the exercise prices of previously granted and unexercised options held by certain employees, directors and key advisers with exercise prices between $9.00 and $10.50 per share, would be adjusted (the “Stock Option Repricing”) to equal the initial offering price, contingent and effective upon the completion of the Company’s IPO. In connection with the closing of the IPO, the Stock Option Repricing was completed and the options to purchase 4,092,887 shares of the Company’s common stock, with exercise prices previously between $9.00 and $10.50, were repriced to the initial offering price of $6.00 per share, of which a total of 2,796,400 shares of Common Stock are held by executive officers and directors. The total cost of the repricing was $2,733, of which $2,606 was recorded during the three months ended March 31, 2023, with the remainder of the cost being recorded over the future vesting periods of the options.

 

During the three months ended March 31, 2023, the Company recorded $227 of stock compensation for the value of all options vesting during the period. As of March 31, 2023, unvested compensation of $1,751 remained that will be amortized over the remaining vesting period, through September 2025. The aggregate intrinsic value for option shares outstanding at March 31, 2023 was $90,933.

 

At the time of the issuances of stock options, the Company believed the Company’s estimates of the fair value for financial reporting purposes of the Company’s common stock were reasonable and consistent with the Company’s understanding of how similarly situated companies in the industry were valued.

 

Stock Warrants

 

The table below summarizes the Company’s warrants activities for the three months ended March 31, 2023:

 

   Number of
Warrant Shares
   Exercise
Price Range
Per Share
   Weighted Average
Exercise Price
 
               
Balance, December 31, 2022   725,174   $  3.00 - 10.50   $8.24 
Granted   331,269      5.40 - 10.50    7.44 
Cancelled   (36)    9.00    9.00 
Exercised   (16,666)    9.00    9.00 
Expired   (4,762)    10.50    10.50 
                 
Balance, March 31, 2023   1,034,979   $  3.00 - 10.50   $7.96 
                 
Vested and exercisable, March 31, 2023   1,034,979   $ 3.00 - 10.50   $7.96 

 

19
 

 

The following table summarizes information concerning outstanding and exercisable warrants as of March 31, 2023:

 

   Warrants Outstanding   Warrants Exercisable 
Range of Exercise Prices  Number
Outstanding
   Average
Remaining
Contractual Life
(in years)
   Weighted
Average
Exercise Price
   Number
Exercisable
   Average
Remaining
Contractual
Life (in years)
   Weighted
Average
Exercise Price
 
$3.00    133,333    3.92   $3.00    133,333    3.92   $3.00 
 5.409.00    627,940    3.19    7.91    627,940    3.19    7.91 
 10.50    273,706    1.41    10.50    273,706    1.41    10.50 
$3.0010.50    1,034,979    2.82   $7.96    1,034,979    2.82   $7.96 

 

Upon the closing of the IPO, the Company agreed to issue to the underwriters, warrants entitling them to purchase up to 175,000 shares of the Company’s common stock. The warrants have an exercise price of $6.00 per share and expire on the fifth anniversary of the closing date of the IPO, or January 2028.

 

During the three months ended March 31, 2023, the Company granted warrants to certain of its lenders to purchase up to 44,441 shares of the Company’s common stock (see Note 6). The warrants have an exercise price of $5.40 per share and expire three years from the date of the grant.

 

During the three months ended March 31, 2023, the Company granted warrants to certain of its lenders to purchase up to 111,828 shares of the Company’s common stock. The warrants have an exercise price of $10.50 per share and expire in April 2023. In addition, the Company has entered into convertible debt agreements with two lenders under which the agreements contain a provision that in the case the lender converts the notes into shares of the Company’s common stock, the lender will receive a warrant to purchase up to 25% of the shares converted, with exercise prices ranging from $9.00 to $10.50 per share. The warrants, if issued, will expire over various periods from the date of grant, but none exceeding ten years. The maximum total number of warrant shares that could be granted is 69,893 as of March 31, 2023.

 

The Company calculated the aggregate fair value of the warrants on the date of grant to be $3,110 using a Black-Scholes pricing model. As all of the debt converted during the three months ended March 31, 2023, the value of the warrants was recorded as a financing cost during the same period. Subsequent to March 31, 2023, the 111,828 shares were exercised for proceeds of $1,174.

 

During the three months ended March 31, 2023, a warrant holder completed a cashless exercise of their stock warrant. The holder exercised 16,666 warrant shares at an exercise price of $9.00 per share and received 11,666 shares of the Company’s common stock.

 

The aggregate intrinsic value for warrant shares outstanding at March 31, 2023 was $13,745.

 

NOTE 10 - LEGAL MATTERS

 

We are currently involved in one pending litigation. Although the results of the pending legal proceeding in which we currently are involved cannot be predicted with certainty, we do not believe that there is a reasonable possibility that the final outcome of this matter will have a material adverse effect on our business or financial results. Regardless of the final outcome, however, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, harm to our reputation and brand, and other factors.

 

We are not currently a party, nor have we received threat or notice that we will be a party, to any other legal proceedings. In the future, we may be involved in additional actual and/or threatened legal proceedings, claims, investigations and government inquiries arising in the ordinary course of our business, including legal proceedings, claims, investigations and government inquiries involving intellectual property, data privacy and data protection, privacy and other torts, illegal or objectionable content, consumer protection, securities, employment, contractual rights, civil rights infringement, false or misleading advertising, or other legal claims relating to our business.

 

NOTE 11 - SUBSEQUENT EVENTS

 

On May 12, 2023, the Company entered into a Securities Purchase Agreement, or the Purchase Agreement, with certain investors, or the Purchasers, pursuant to which the Company agreed to sell and issue 1,665,213 shares of its Common Stock in the Private Placement. The purchase price per share of Common Stock is $20.00 per share. The initial closing of the Private Placement is expected to occur on or before May 19, 2023, or the Initial Closing, subject to customary closing conditions. The total gross proceeds to us at the Initial Closing from the Private Placement are expected to be approximately $33,300, including approximately $1,500 from the cancellation of certain of the Company’s bridge loans and accrued interest (see Note 6). Two of the Purchasers will, and are contractually obligated to, fund up to $15,000 of such Purchasers’ investment amounts following the Initial Closing but no later than November 15, 2023.

 

Subsequent to March 31, 2023, the Company repaid one of its bridge loans (see Note 6) totaling $210, including $200 of principal and $10 of accrued interest. As of the date of this filing, no amounts are due on the bridge loans, including accrued interest.

 

Subsequent to March 31, 2023, warrants to purchase 111,828 shares of common stock were exercised for proceeds of $1,174.

 

20
 

 

Item 2. Management’s discussion and analysis of financial condition and results of operations

 

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q, or this Quarterly Report, and with our audited financial statements and notes thereto for the year ended December 31, 2022, included in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2022.

 

In addition to historical information, some of the statements contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We have based these forward-looking statements on our current expectations and any projections about future events. The following information and any forward-looking statements should be considered in light of factors discussed elsewhere in this Quarterly Report, particularly including those risks identified in Part II, Item 1A “Risk Factors” and our other filings with the Securities Exchange Commission, or SEC.

 

We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. Statements made herein are as of the date of the filing of this Quarterly Report with the SEC and should not be relied upon as of any subsequent date. Even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results or developments in future periods. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions or circumstances on which any such statements may be based or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

Overview

 

Genelux is a late clinical-stage biopharmaceutical company focused on developing a pipeline of next-generation oncolytic viral immunotherapies for patients suffering from aggressive and/or difficult-to-treat solid tumor types. Our most advanced product candidate, Olvi-Vec, is a proprietary, modified strain of the VACV, a stable DNA virus with a large engineering capacity. We have met the preestablished endpoint for our Phase clinical 2 trial of Olvi-Vec in PRROC. Employing our CHOICE platform, we have developed an extensive library of isolated and engineered oncolytic vaccinia virus immunotherapeutic product candidates. These provide potential utility in multiple tumor types in both the monotherapy and combination therapy settings, via physician- preferred administration techniques, including regional (e.g., intraperitoneal), local and systemic (e.g., intravenous) delivery routes. Informed by our CHOICE platform and supported by extensive clinical and pre-clinical data, we believe we have the capacity to develop a pipeline of treatment options to address high unmet medical needs for those patients with insignificant or unsatisfactory responses to standard-of-care therapies, including chemotherapies. From this library, we selected Olvi-Vec, which we believe has the potential to exhibit anti-tumor properties, including potent oncolytic properties (tumor cell lysis) and to activate both the innate and adaptive arms of the immune system, to produce favorable changes within the tumor microenvironment. The personalized and multi-modal immune activation generated by Olvi-Vec is designed with the goal to yield clinically- meaningful anti-tumor responses to virus treatment alone and in combination with other existing treatment modalities. We believe Olvi-Vec currently represents the most advanced clinical development program throughout the oncolytic treatment landscape involving the non-local administration (e.g., non-intratumorally) of viral immunotherapies.

 

Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, acquiring and developing our technology, establishing our intellectual property portfolio, identifying potential product candidates and undertaking preclinical and clinical studies and manufacturing. We do not have any products approved for sale and have not generated any revenue from product sales.

 

21
 

 

Since inception, we have incurred significant operating losses. Our net loss was $10.4 million for the three months ended March 31, 2023. As of March 31, 2023, we had an accumulated deficit of $203.6 million. We expect to continue to incur significant and increasing expenses and operating losses for the foreseeable future, as we advance our current and future product candidates through preclinical and clinical development, manufacture drug product and drug supply, seek regulatory approval for our current and future product candidates, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel and operate as a public company.

 

The COVID-19 pandemic did not have a material net impact on our operating results, however, it did have some impact on our supply chain and a number of our potential clinical trial sites report having continued resource constraints. It is unknown what, if any, the long-term impact the COVID-19 pandemic will have on our business operations.

 

We will not generate revenue from commercially approved product sales unless and until we successfully complete clinical development and obtain regulatory approval for our product candidates. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to developing our commercialization capability to support product sales, marketing, manufacturing, and distribution activities.

 

As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when needed, could have a material adverse effect on our business, results of operations and financial condition.

 

The report of our independent registered public accounting firm on our financial statements as of and for the year ended December 31, 2022 included an explanatory paragraph indicating that there was substantial doubt about our ability to continue as a going concern. See Note 1 to our annual financial statements for additional information on our assessment.

 

As of March 31, 2023, we had a cash balance of $10.3 million. We expect our cash on hand at March 31, 2023, together with the proceeds from our recently announced private placement, or the Private Placement, will last until the first quarter of 2025.

 

Recent Developments

 

In April 2023, Newsoara initiated a Phase 1/2 clinical trial of Olvi-Vec in patients with recurrent small cell lung cancer (SCLC) in China. The first enrolled participant, in addition to SCLC, had metastases in brain, liver and lymph nodes with ongoing atrial fibrillation and anemia. Upon receiving study treatment, the patient experienced impaired liver function, coagulation disorder, low platelets, increased blood amylase, and fever. The patient subsequently recovered, remains on trial and has received scheduled chemotherapy in accordance with the trial protocol. Newsoara intends to continue the trial as planned, initially with de-escalated dose cohorts due to Olvi-Vec treatment-naïve Asian study population, but with the goal of completing all dose cohorts per the trial protocol and of completing the trial on the original timeline. We do not expect any impact on our ongoing and future US clinical trials.

 

Components of Results of Operations

 

Net Sales

 

During the year ended December 31, 2022, under our Newsoara and Elias agreements, we recognized revenue of $11.1 million, with a 10% foreign income tax of $1.1 million being recorded as a provision for foreign income taxes relating to our Newsoara agreement.

 

During the year ended December 31, 2022, under our Newsoara agreement, we invoiced and collected $0.2 million relating to supplying product for Newsoara to use in its clinical trials. As the product did not ship during the year ended December 31, 2022, we recorded the cash received as deferred revenue until the product was shipped. During the three months ended March 31, 2023, we shipped the product to Newsoara and thus recognized the revenue.

 

Operating Expenses

 

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

 

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Research and Development Expenses

 

Research and development expenses consist primarily of costs incurred for our research and development activities, including our product candidate discovery efforts and preclinical and clinical studies under our research programs, which include:

 

employee-related expenses, including salaries, benefits and stock-based compensation expense for our research and development personnel;

 

costs of funding research performed by third parties that conduct research and development and preclinical and clinical activities on our behalf;

 

costs of manufacturing drug product and drug supply related to our current or future product candidates;

 

costs of conducting preclinical studies and clinical trials of our product candidates;

 

consulting and professional fees related to research and development activities, including equity-based compensation to non-employees;

 

costs of maintaining our laboratory, including purchasing laboratory supplies and non-capital equipment used in our preclinical studies;

 

costs related to compliance with clinical regulatory requirements; and

 

facility costs and other allocated expenses, which include expenses for rent and maintenance of facilities, insurance, depreciation and other supplies.

 

Research and development costs are expensed as incurred. Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our preclinical and clinical studies or other services performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period.

 

The successful development of our product candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete development of our current or future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from the sale of our product candidates, if they are approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:

 

the scope, rate of progress, and expenses of our ongoing research activities as well as any preclinical studies and clinical trials and other research and development activities;

 

establishing an appropriate safety profile;

 

successful enrollment in and completion of clinical trials;

 

whether our product candidates show safety and efficacy in our clinical trials;

 

receipt of marketing approvals from applicable regulatory authorities;

 

establishing commercial manufacturing capabilities or making arrangements with third-party manufacturers;

 

obtaining and maintaining patent and trade secret protection and regulatory exclusivity for our product candidates;

 

commercializing product candidates, if and when approved, whether alone or in collaboration with others; and

 

continued acceptable safety profile of the products following any regulatory approval.

 

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A change in the outcome of any of these variables with respect to the development of our current and future product candidates would significantly change the costs and timing associated with the development of those product candidates.

 

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as we commence clinical trials and continue the development of our current and future product candidates. However, we do not believe that it is possible at this time to accurately project expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs and plans.

 

General and Administrative Expenses

 

General and administrative expenses include salaries and other compensation-related costs, including stock-based compensation, for personnel in executive, finance and accounting, business development, operations and administrative roles. Other significant costs include professional service and consulting fees, including legal fees relating to intellectual property and corporate matters, accounting fees, recruiting costs and costs for consultants who we utilize to supplement our personnel, insurance costs, travel costs, facility and office-related costs not included in research and development expenses.

 

We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in research and development activities, including our future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside service providers, among other expenses. We also anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services related to compliance with the rules and regulations of the SEC, and listing standards applicable to companies listed on a national securities exchange, director and officer insurance premiums, and investor relations costs. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities.

 

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Results of Operations

 

Comparison of the Three Months Ended March 31, 2023 and 2022

 

The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022 (in thousands):

 

   March 31,   March 31, 
   2023   2022 
Revenues  $170   $ 
           
Operating Expenses:          
Research and development   2,845    2,369 
General and administrative   3,787    1,095 
Total operating expenses   6,632    3,464 
Loss from operations   (6,462)   (3,464)
Other Expenses:          
Interest expense   (143)   (288)
Debt discount amortization   (649)   (49)
Financing costs   (3,110)   - 
Total other expenses   (3,902)   (337)
           
Net loss  $(10,364)  $(3,801)

 

Research and Development Expenses

 

The table below summarizes our research and development expenses for the three months ended March 31, 2023 and 2022 (in thousands):

 

   March 31,   March 31, 
Research and Development Expenses:  2023   2022 
Employee compensation and related expenses  $393   $394 
Stock compensation, including the cost of stock option modifications and restricted stock grants   736    63 
Manufacturing and laboratory materials and other expenses   93    280 
Outsourced manufacturing services   280    375 
Clinical and regulatory expenses   826    733 
Facility-related expenses, including depreciation   300    375 
Consulting expenses and contract labor   208    132 
Other expenses   9    17 
Total research and development expenses  $2,845   $2,369 

 

Research and development expenses were $2.8 million and $2.4 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $0.4 million, or 20%. Significant variations between periods are as a result of a $0.7 million increase in stock compensation expense in 2023, primarily due to stock option modification costs and the issuance of restricted stock units in 2023. 

 

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General and Administrative Expenses

 

The table below summarizes our general and administrative expenses for the three months ended March 31, 2023 and 2022 (in thousands):

 

   March 31,   March 31, 
General and Administrative Expenses:  2023   2022 
Employee compensation and related expenses  $459   $371 
Stock compensation, including the cost of stock option modifications and restricted stock grants   2,295    310 
Professional services   674    84 
Facility-related expenses   80    70 
Insurance expenses   208    78 
Consulting and contract labor expenses   36    148 
Other expenses   35    34 
Total general and administrative expenses  $3,787   $1,095 

 

General and administrative expenses were $3.8 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively, an increase of $2.7 million, or 246%. Significant variations between periods are as follows:

 

● a $2.0 million increase in stock compensation expense in 2023, primarily due to stock option modification costs and the issuance of restricted stock units in 2023; and

 

a $0.6 million increase in professional service expenses in 2023, primarily resulting from increased corporate legal costs and other professional services related to our being a newly publicly-traded company.

 

Other Expenses

 

Other expenses were $3.9 million and $0.3 million for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023, other expenses consisted of interest expense of $0.1 million, debt discount amortization of $0.7 million and financing costs of $3.1 million, while during the same period in 2022, other expenses consisted of interest expense of $0.3 million and debt discount amortization of $0.05 million.

 

Liquidity and Capital Resources

 

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, during the three months ended March 31, 2023, we incurred a net loss of $10.4 million and used cash in operations of $4.6 million and had an accumulated deficit of $203.6 million as of March 31, 2023. These factors raise substantial doubt about our ability to continue as a going concern. The ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our strategies. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. 

 

In addition, our independent registered public accounting firm, in its report on our December 31, 2022 financial statements, has raised substantial doubt about our ability to continue as a going concern.

 

As of March 31, 2023, we had cash on hand in the amount of $10.3 million. The ability to continue as a going concern is dependent on our attaining and maintaining profitable operations in the future and raising additional capital to meet our obligations and repay our liabilities arising from normal business operations when they come due. Since inception, we have funded our operations primarily through equity and debt financings and licensing income, and we expect to continue to rely on these sources of capital in the future. During the three months ended March 31, 2023, we closed our IPO and received net proceeds of $12.6 million. We expect our cash on hand at March 31, 2023, together with the proceeds from our recently announced Private Placement, will last until the first quarter of 2025.

 

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No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing, or grant unfavorable terms in licensing future licensing agreements.

 

Cash Flows

 

The table below summarizes our cash flow activities for the three months ended March 31, 2023 and 2022 (in thousands):

 

   March 31,   March 31, 
Net cash provided by (used in):  2023   2022 
Operating activities  $(4,590)  $2,825 
Investing activities   (109)   (15)
Financing activities   14,640    (130)
Net increase in cash  $9,941   $2,680 

 

Operating Activities

 

During the three months ended March 31, 2023, we used cash from operating activities of $4.6 million, compared to $2.8 million provided during the three months ended March 31, 2022. During the three months ended March 31, 2023, we incurred a net loss of $10.4 million and had non-cash expenses of $7.0 million, compared to a net loss of $3.8 million and non-cash expenses of $0.7 million during the three months ended March 31, 2022. The primary non-cash expense during both periods was stock-related compensation, totaling $6.1 million and $0.4 million during the three months ended March 31, 2023 and 2022, respectively. The net change in operating assets and liabilities during the three months ended March 31, 2023 used cash of $1.3 million compared to $6.0 million provided during the three months ended March 31, 2022. The primary use of cash during the three months ended March 31, 2023 was the decrease in accounts payable and accrued expenses of $0.9 million. The primary source of cash during the three months ended March 31, 2022 was the increase in deferred revenue of $5.5 million.

 

Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2023 was $0.1 million, consisting of the purchase of property and equipment. Net cash used in investing activities for the three months ended March 31, 2022 was $0.01 million, consisting of the purchase of property and equipment.

 

Financing Activities

 

During the three months ended March 31, 2023, we provided cash from operating activities of $14.6 million, compared to $0.1 million used during the three months ended March 31, 2022. For the three months ended March 31, 2023, cash provided by financing activities consisted of proceeds from the issuance of proceeds from notes payable - shareholders totaling $0.9 million and proceeds from the sale of common stock related to our IPO totaling $14.5 million, excluding offering costs paid by us.

 

Net cash used in financing activities during the three months ended March 31, 2023 related to the repayment of notes payable - shareholders totaling $0.5 million and the payment of deferred offering costs of $0.3 million. Net cash used in financing activities for the three months ended March 31, 2022 was $0.1 million related to the repayment of convertible notes payable - shareholders.

 

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Equity Financing

 

On May 12, 2023, we entered into a Securities Purchase Agreement, or the Purchase Agreement, with certain investors, or the Purchasers, pursuant to which we agreed to sell and issue 1,665,213 shares of our Common Stock in the Private Placement. The purchase price per share of Common Stock is $20.00 per share. The initial closing of the Private Placement is expected to occur on or before May 19, 2023, or the Initial Closing, subject to customary closing conditions. The total gross proceeds to us from the Private Placement are expected to be approximately $33.3 million, including approximately $1.5 million from the cancellation of existing indebtedness. Two of the Purchasers will, and are contractually obligated to, fund up to $15 million of such Purchasers’ investment amounts following the Initial Closing but no later than November 15, 2023.

 

Funding Requirements

 

We expect our expenses to increase in connection with our ongoing activities, particularly as we continue our research and development, initiate and conduct preclinical studies and clinical trials, and seek marketing approval for our current and any of our future product candidates. In addition, if we obtain marketing approval for any of our current or our future product candidates, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution, which costs we may seek to offset through entry into collaboration agreements with third parties. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on acceptable terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.

 

We expect our cash on hand at March 31, 2023, together with the proceeds from our recently announced Private Placement, will last until the first quarter of 2025. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Our future capital requirements will depend on a number of factors, including:

 

the costs of conducting preclinical studies and clinical trials;

 

the costs of manufacturing;

 

the scope, progress, results and costs of discovery, preclinical development, laboratory testing, and clinical trials for product candidates we may develop, if any;

 

the costs, timing, and outcome of regulatory review of our product candidates;

 

our ability to establish and maintain collaborations on favorable terms, if at all;

 

the achievement of milestones or occurrence of other developments that trigger payments under any license or collaboration agreements we might have at such time;

 

the costs and timing of future commercialization activities, including product sales, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;

 

the amount of revenue, if any, received from commercial sales of our product candidates, should any of our product candidates receive marketing approval;

 

the costs of preparing, filing and prosecuting patent applications, obtaining, maintaining and enforcing our intellectual property rights, and defending intellectual property-related claims;

 

our headcount growth and associated costs as we expand our business operations and research and development activities; and

 

the costs of operating as a public company.

 

We expect our cash on hand at March 31, 2023, together with the proceeds from our recently announced Private Placement, will last until the first quarter of 2025.

 

Accordingly, we will be required to obtain further funding to achieve our business objectives.

 

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a common stockholder. Additional debt financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.

 

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If we raise funds through potential collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.

 

We define our critical accounting policies as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in Note 2 to our audited financial statements appearing elsewhere in this Quarterly Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.

 

Prepaid Research and Development Expenses

 

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our research and development expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.

 

The significant estimates in our prepaid research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced. We base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense.

 

In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.

 

Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period.

 

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Stock-Based Compensation

 

We measure stock options and other stock-based awards granted to employees and directors based on the fair value of the award on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. We recognize forfeitures as they occur. The reversal of compensation cost previously recognized for an award that is forfeited because of a failure to satisfy a service or performance condition is recognized in the period of the forfeiture. Generally, we issue stock options with only service-based vesting conditions and record the expense for these awards using the straight-line method over the requisite service period.

 

We classify equity-based compensation expense in our statements of operations in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified. In future periods, we expect equity-based compensation expense to increase, due in part to our existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain employees.

 

Determination of the Fair Value of Equity-Based Awards

 

We estimate the fair value of stock option awards granted using the Black-Scholes option-pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make, including expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we base the estimate of expected stock price volatility on the historical volatility of a representative group of publicly traded companies for which historical information is available. The historical volatility is generally calculated based on a period of time commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For options granted to non-employees, we utilize the contractual term. The risk- free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero, as we have never paid dividends and do not have current plans to pay any dividends on our common stock. We determine the fair value of restricted common stock awards based on the fair value of our common stock on the date of grant.

 

As there has been no public market for our common stock, prior to our IPO, the estimated fair value of our common stock had been approved by our board of directors, with input from management, as of the date of each award grant, considering our most recently available sale of our common stock to independent investors and our board of directors’ assessment of additional objective and subjective factors deemed relevant that may have changed from the date of the most recent determination through the date of the grant.

 

The additional objective and subjective factors considered by our board of directors in determining the fair value of our common stock included the following:

 

the prices of our common stock and preferred stock sold to outside investors in arm’s length transactions, if any, and the rights, preferences and privileges of our preferred stock as compared to those of our common stock, including the liquidation preferences of our preferred stock;

 

the progress of our research and development efforts, including the status of preclinical studies and planned clinical trials for our product candidates;

 

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the lack of liquidity of our equity as a private company;

 

our stage of development and business strategy and the material risks related to our business and industry;

 

the valuation of publicly traded companies in the biotechnology industry, as well as recently completed mergers and acquisitions of peer companies;

 

any external market conditions affecting the biotechnology industry, and trends within the biotechnology industry;

 

the likelihood of achieving a liquidity event, such as an IPO or a sale of our company in light of prevailing market conditions; and

 

the analysis of IPOs and the market performance of similar companies in the biotechnology industry.

 

The assumptions underlying our board of directors’ valuation determinations represented our board’s best estimates, which involved inherent uncertainties and the application of our board’s judgment. As a result, if factors or expected outcomes had changed or our board of directors had used significantly different assumptions or estimates, our equity-based compensation expense could have been materially different. Following the completion of this offering, our board of directors will determine the fair value of our common stock based on the quoted market prices of our common stock.

 

Commitments and Contingencies

 

From time to time, we may have certain contingent liabilities that arise in the ordinary course of business. We evaluate the likelihood of an unfavorable outcome in legal or regulatory proceedings to which we are a party and record a loss contingency on an undiscounted basis when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective and based on the status of such legal proceedings, the merits of our defenses, and consultation with legal counsel. Actual outcomes of these legal proceedings may differ materially from our estimates. We estimate accruals for legal expenses when incurred as of each balance sheet date based on the facts and circumstances known to us at that time.

 

Off-Balance Sheet Arrangements

 

During the three months ended March 31, 2023 and 2022, we did not have, and we do not currently have, any off-balance sheet arrangements (as defined under SEC rules).

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates. However, we have contracted with and may continue to contract with foreign vendors that are located in Europe. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.

 

Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the three months ended March 31, 2023 or 2022.

 

Recent Accounting Pronouncements

 

For a description of recently issued accounting standards that may have a material impact on our financial statements or will otherwise apply to our operations, please see Note 2 to our audited financial statements appearing elsewhere in this Quarterly Report.

 

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Emerging Growth Company Status

 

As an “emerging growth company,” the Jumpstart Our Business Startups Act of 2012 permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

Not applicable.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2023.

 

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

 

Management’s Report on Internal Control Over Financial Reporting

 

This Quarterly Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the first quarter of 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are currently involved in one pending litigation. Although the results of the pending legal proceeding in which we currently are involved cannot be predicted with certainty, we do not believe that there is a reasonable possibility that the final outcome of this matter will have a material adverse effect on our business or financial results. Regardless of the final outcome, however, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, harm to our reputation and brand, and other factors.

 

In the future, we may be involved in additional actual and/or threatened legal proceedings, claims, investigations and government inquiries arising in the ordinary course of our business, including legal proceedings, claims, investigations and government inquiries involving intellectual property, data privacy and data protection, privacy and other torts, illegal or objectionable content, consumer protection, securities, employment, contractual rights, civil rights infringement, false or misleading advertising, or other legal claims relating to our business.

 

Item 1A. Risk Factors

 

Risk Factor Summary

 

We face many risks and uncertainties, as more fully described in this section under the heading “Risk Factors.” Some of these risks and uncertainties are summarized below. The summary below does not contain all of the information that may be important to you, and you should read this summary together with the more detailed discussion of these risks and uncertainties contained in “Risk Factors.” Some of the material risks associated with our business include the following:

 

  We have incurred significant losses since our inception and anticipate that we will incur significant and increasing losses for the foreseeable future and we may never achieve or maintain profitability.
     
  We will require substantial additional financing to advance the development of our product candidates, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, potential commercialization efforts or other operations.
     
  Our product candidates are in preclinical and clinical stages of development, are not approved for commercial sale and might never receive regulatory approval or become commercially viable.
     
  Our product candidates are based on a novel approach to the treatment of cancer, which makes it difficult to predict the time and cost of product candidate development.
     
  We currently have only one product candidate, Olvi-Vec, in clinical development. A failure of this product candidate in clinical development would adversely affect our business and may require us to discontinue development of other product candidates based on the same therapeutic approach.
     
  Preclinical and clinical development involve a lengthy and expensive process with an uncertain outcome and stringent regulations, and delays can occur for a variety of reasons.
     
  Changes in product candidate manufacturing or formulation may result in additional costs or delay.
     
  If we are unable to manufacture and release any product candidates in the volumes that we require on a timely basis, or fail to comply with stringent regulations applicable to biopharmaceutical manufacturers, we may face delays in the development and commercialization of, or be unable to meet demand for, any product candidates and may lose potential revenues.
     
  If we fail to comply with federal and state healthcare laws, including fraud and abuse laws, we could face substantial penalties and our business, financial condition, results of operations, stock price and prospects will be materially harmed.

 

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  We are subject to stringent and evolving U.S. and foreign laws, regulations, rules, contractual obligations, policies and other obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse business consequences.
     
  If we are unable to obtain, maintain and protect our intellectual property rights for our technology and product candidates, or if our intellectual property rights are inadequate, our competitive position could be harmed.
     
  We are highly dependent on our key personnel, including our President, Chief Executive Officer and Chairman. If we are not successful in attracting, motivating and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.
     
  Unfavorable market and economic conditions may have serious adverse consequences on our business, financial condition, results of operations, stock price and prospects.
     
  Public health crises such as pandemics, including the COVID-19 pandemic, or similar outbreaks could materially and adversely affect our preclinical studies and clinical trials, business, financial condition and results of operations.
     
  The market price of our common stock has been extremely volatile and may continue to be volatile due to numerous circumstances beyond our control, which could result in substantial losses for our stockholders.

 

Risk Factors

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report, including our financial statements and the related notes and “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” before deciding whether to purchase, hold or sell shares of our common stock. If any of the following risks are realized, our business, financial condition, results of operations, stock price and prospects could be materially and adversely affected. In that event, the price of our common stock could decline, and you could lose part or all of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

 

Risks Related to our Financial Position and Need for Additional Capital

 

We have incurred significant losses since our inception and anticipate that we will incur significant and increasing losses for the foreseeable future and we may never achieve or maintain profitability.

 

We are a clinical stage biopharmaceutical company, and our operations to date have been focused substantially on organizing and staffing our company, business planning, raising capital, creating, assessing, and developing our technology, establishing our intellectual property portfolio, identifying potential product candidates, undertaking preclinical studies, commencing clinical trials and manufacturing. Additionally, as an organization, we have not yet demonstrated an ability to successfully complete clinical development, obtain regulatory approvals, manufacture a commercial-scale product, or conduct sales and marketing activities necessary for successful commercialization. We have never generated any revenue from commercially approved product sales and have incurred significant operating losses. Our net loss was $10.4 million and $3.8 million for the three months ended March 31, 2023 and 2022, respectively. As March 31, 2023, we had an accumulated deficit of $203.6 million. We expect to continue to incur significant and increasing operating losses for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ deficit and working capital.

 

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We expect that it will be several years, if ever, before we have a commercialized product. The net losses we incur may fluctuate significantly from quarter to quarter and year to year. We anticipate that our expenses will increase substantially if, and as, we:

 

advance the Phase 3 registration clinical trial for our lead product candidate, Olvi-Vec, in PRROC;
   
initiate planned and future clinical trials of Olvi-Vec in other cancer indications;
   
discover and develop new product candidates, and conduct research and development activities, preclinical studies and clinical trials;
   
manufacture preclinical, clinical and commercial supplies of our product candidates;
   
broaden and strengthen our internal manufacturing capabilities, including the expansion and upgrade of our in-house manufacturing facility;
   
seek regulatory approvals for any product candidates that successfully complete clinical trials;
   
maintain, expand and protect our intellectual property portfolio;
   
hire additional research and development, clinical, scientific and management personnel;
   
add operational, financial and management information systems and personnel;
   
establish a sales, marketing and distribution infrastructure to commercialize any product candidate for which we may obtain regulatory approval and we commercialize on our own or in collaboration with others; and
   
incur additional legal, accounting and other expenses operating as a public company.

 

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical testing and clinical trials, obtaining regulatory approval for product candidates and manufacturing, marketing and selling products for which we may obtain marketing approval and satisfying any post-marketing requirements. We are only in the development stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenue that is significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts or even continue our operations. A decline in the value of our company could also cause stockholders to lose all or part of their investment.

 

We will require substantial additional financing to advance the development of our product candidates, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital could force us to delay, limit, reduce or terminate our product development programs, potential commercialization efforts or other operations.

 

The development of biopharmaceutical product candidates is capital-intensive. Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to continue the preclinical and clinical development of, and seek regulatory approval for, our current and future product candidates. If we are able to gain marketing approval of any product candidate that we develop, including Olvi-Vec, we will require significant additional amounts of cash in order to launch and commercialize such product either alone or in collaboration with others. Because the design and outcome of our ongoing, anticipated and any future clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of any product candidate we develop.

 

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Our future capital requirements depend on many factors, including:

 

the scope, progress, results and costs of researching and developing Olvi-Vec and our other product candidates and programs, and of conducting preclinical studies and clinical trials;
   
the timing of, and the costs involved in, obtaining marketing approvals for Olvi-Vec and future product candidates we develop if clinical trials are successful;
   
the success of any future collaborations;
   
the cost of commercialization activities for any approved product, including marketing, sales and distribution costs;
   
the cost and timing of establishing, equipping, and operating our current and planned manufacturing activities;
   
the cost of manufacturing Olvi-Vec and future product candidates for clinical trials in preparation for marketing approval and commercialization;
   
our ability to establish and maintain strategic licensing or other arrangements and the financial terms of such agreements;
   
the cost, timing and outcome of seeking FDA and any other regulatory approvals for any future product candidates;
   
the costs involved in preparing, filing, prosecuting, maintaining, expanding, defending and enforcing patent claims, including litigation costs and the outcome of such litigation;
   
our ability to establish and maintain healthcare coverage and adequate reimbursement for our future products, if any;
   
the timing, receipt, and amount of sales of, or royalties on, our future products, if any;
   
the emergence of competing cancer therapies and other adverse market developments;
   
our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates;
   
the costs associated with being a public company;
   
our need and ability to retain key management and hire scientific, technical, medical and business personnel;
   
the costs associated with expanding our facilities or building out our laboratory space; and
   
the effects of the recent disruptions to and volatility in the credit and financial markets in the United States and the overall impact of the COVID-19 pandemic.

 

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We do not have any committed external source of funds or other support for our development efforts. Until we can generate sufficient product revenue to finance our cash requirements, which we may never do, we expect to finance our future cash needs through a combination of public or private equity offerings and debt financings, or other capital sources such as potential collaborations, strategic alliances, licensing arrangements and other arrangements. We expect our cash on hand at March 31, 2023, together with the proceeds from our recently announced Private Placement, will last until the first quarter of 2025. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. In addition, because the design and outcome of our anticipated and any future clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of Olvi-Vec or any future product candidates. Our existing cash balance, may not be sufficient to complete development of Olvi-Vec or any other product candidate. Additionally, although we recently signed a securities purchase agreement in connection with our Private Placement, the Private Placement may not close and we may not receive some or all of the committed proceeds, which would exhaust our available capital resources sooner than we expected. Accordingly, we will be required to obtain further funding to achieve our business objectives.

 

We have never generated any revenue from commercially approved product sales and may never become profitable.

 

Our ability to generate revenue from product sales and achieve profitability depends on our ability, alone or with future partners, to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, our development programs. We have no products approved for commercial sale, have not generated any revenue from commercially approved product sales, and do not anticipate generating any revenue from commercially approved product sales until after we have received marketing approval for the commercial sale of a product candidate, if ever. Our ability to generate revenue and achieve profitability depends heavily on our success in achieving a number of goals, including:

 

completing research regarding, and preclinical and clinical development of, product candidates and programs, including Olvi-Vec, and identifying and developing new product candidates;
   
obtaining marketing approvals for any product candidates for which we complete clinical trials;
   
obtaining regulatory approval to use and sell products generated by our existing or future manufacturing processes for Olvi-Vec and future product candidates, including at our existing manufacturing facility and/or by establishing and maintaining supply and manufacturing relationships with third parties;
   
launching and commercializing product candidates for which we obtain marketing approvals, either directly by establishing a sales force and marketing, medical affairs and distribution infrastructure or, alternatively, with a collaborator or distributor;
   
establishing and maintaining healthcare coverage and adequate reimbursement for our future products, if any;
   
obtaining market acceptance of product candidates that we develop as viable treatment options;
   
addressing any competing technological and market developments;
   
identifying, assessing, acquiring and developing new product candidates;
   
negotiating favorable terms in any collaboration, licensing, or other arrangements into which we may enter and performing our obligations in such collaborations;
   
maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents, trade secrets, and know-how; and
   
attracting, hiring, and retaining qualified personnel.

 

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Even if Olvi-Vec or any future product candidates that we develop are approved for commercial sale, we anticipate incurring significant costs associated with commercializing any such product candidate that we commercialize on our own or in collaboration with others. Our expenses could increase beyond expectations if we are required by the FDA or comparable foreign regulatory authorities, to change our manufacturing processes or assays, or to perform clinical, nonclinical, or other types of studies in addition to those that we currently anticipate.

 

If we are successful in obtaining regulatory approvals to market Olvi-Vec or any future product candidates, our revenue will be dependent, in part, upon the size of the markets in the territories for which we gain marketing approval, the accepted price for the product, the ability to get reimbursement at any price, and whether we own the commercial rights for that territory. If the number of our addressable patients is not as significant as we estimate, the indications approved by regulatory authorities are narrower than we expect, the labels for our product candidates contain significant safety warnings, regulatory authorities impose burdensome or restrictive distribution requirements, or the reasonably accepted patient populations for treatment are narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of such products, even if approved. If we are not able to generate revenue from the sale of any approved products, we could be prevented from or significantly delayed in achieving profitability.

 

Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates.

 

To the extent that we raise additional capital through the sale of common stock or securities convertible or exchangeable into common stock, our stockholders’ ownership interest may be diluted. Any future debt financings we undertake, if available, are likely to involve restrictive covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through licensing or collaboration arrangements with third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us. We also could be required to seek collaborators for product candidates at an earlier stage than otherwise would be desirable or relinquish our rights to product candidates or technologies that we otherwise would seek to develop or commercialize ourselves.

 

Failure to obtain capital when needed on acceptable terms may force us to delay, limit or terminate our product development and commercialization of our current or future product candidates, which could have a material and adverse effect on our business, financial condition, results of operations, stock price and prospects. Securing additional financing could also require a substantial amount of time from our management and may divert a disproportionate amount of their attention away from daily activities, which may adversely affect our management’s ability to oversee the development of Olvi-Vec or any future product candidates.

 

The report of our independent registered public accounting firm included a “going concern” explanatory paragraph.

 

The report of our independent registered public accounting firm on our financial statements as of and for the years ended December 31, 2022 and 2021 included an explanatory paragraph indicating that there was substantial doubt about our ability to continue as a going concern. If we are unable to raise additional capital as and when needed, our business, financial condition and results of operations will be materially and adversely affected, and we may be forced to delay our development efforts, limit our activities and reduce research and development costs. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. The inclusion of a going concern explanatory paragraph by our independent registered public accounting firm, our lack of cash resources and our potential inability to continue as a going concern may materially adversely affect our share price and our ability to raise new capital, enter into licensing and collaboration arrangements or other contractual relationships with third parties and otherwise execute our development strategy.

 

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Risks Related to Product Discovery, Development and Regulatory Approval

 

Our development of product candidates based on our technology platform is limited, and we do not know whether we will be able to develop any products of commercial value.

 

The success of our business depends primarily upon our ability to identify novel product candidates based on our CHOICE platform and to successfully develop and commercialize those product candidates. While we have had promising preclinical and clinical study results for Olvi-Vec, to date, it remains our only product candidate that has moved into clinical trials. We have not yet succeeded and may not succeed in demonstrating efficacy and safety in commercializing Olvi-Vec. We also may be unsuccessful in identifying additional product candidates beyond Olvi-Vec using our CHOICE platform, and any of our product candidates may be shown to have harmful side effects or may have other characteristics that may necessitate additional clinical testing, or make the product candidates unmarketable or unlikely to receive marketing approval. In particular, because all of our product candidates have been derived from our CHOICE platform, the failure of any one of our development programs could create a perception that our other programs are less likely to succeed or that our discovery platform is not viable. Similarly, adverse developments with respect to other companies that attempt to use a similar approach to our approach may adversely impact the actual or perceived value and potential of our discovery platform and resulting product candidates.

 

If any of these events occur, our ability to successfully discover, develop and commercialize any product candidates may be impaired and the value of our company could decline significantly.

 

Our product candidates are in preclinical and clinical stages of development, are not approved for commercial sale and might never receive regulatory approval or become commercially viable.

 

All of our product candidates are in research, preclinical or clinical development. We have not completed the development of any product candidates, we currently generate no revenue, and we may never be able to develop a marketable product. Enrollment was completed in September 2019, and we reported multiple data readouts in 2020 (and expect final, long-term readout by the end of 2023) of our Phase 2 clinical trial, an open-label, single-arm study, of our lead product candidate, Olvi-Vec, in patients with PRROC. Our Phase 3 registration trial of Olvi-Vec in PRROC initiated enrollment in the third quarter of 2022.

 

Subject to FDA authorization, we anticipate beginning regulatory study start-up of a Phase 2, open-label, randomized, and controlled clinical trial designed to evaluate the efficacy and safety of intravenously delivered Olvi-Vec oncolytic VACV followed by treatment as per the NCCN Guidelines for patients with recurrent NSCLC in the United States in the first half of 2023, which will be funded in its entirety by Newsoara. We plan to conduct this trial under our current open IND and, subject to regulatory authorization, potentially launch a multi-regional clinical trial with Newsoara in the United States and China. Newsoara recently initiated a Phase 1 clinical trial of Olvi-Vec in patients with recurrent SCLC in China, and in the future plans to initiate trials in recurrent NSCLC and recurrent ovarian cancer in China.

 

Additionally, we have a portfolio of oncolytic VACV constructs that are in early-to-mid stages of discovery and preclinical development and may never advance to clinical-stage development or marketing approval. Our ability to generate product revenues, which we do not expect will occur for several years, if ever, will depend on obtaining marketing approvals for, and successfully commercializing our product candidates, either alone or in collaboration with others, and we cannot guarantee that we will ever obtain marketing approval for any of our product candidates. Before obtaining marketing approval for the commercial distribution of our product candidates, we, or a future collaborator, must conduct extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product candidates.