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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2022

or

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

For the transition period from                      to                     

Commission File Number: 001-40886

Cognition Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

13-4365359

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

2500 Westchester Ave.

Purchase, NY 10577

(Address of Principal Executive Offices)

(412) 481-2210

(Registrant’s telephone number)

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

Title of Each Class

    

Trading symbol

    

Name of Exchange on which registered

Common Stock, par value $0.001 per share

CGTX

The Nasdaq Stock Market LLC

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

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

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

As of November 10, 2022, there were 23,971,042 shares of the registrant’s common stock issued and outstanding.

TABLE OF CONTENTS

    

    

Page

Forward Looking Statements

3

Part I.

Financial Information

5

Item 1.

Financial Statements

5

Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021

5

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021 (Unaudited)

6

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2022 and 2021 (Unaudited)

7

Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)

9

Notes to Consolidated Financial Statements (Unaudited)

10

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

Item 4.

Controls and Procedures

37

Part II.

Other Information

38

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults Upon Senior Securities

38

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

39

Signatures

40

2

Cautionary Note on Forward-Looking Statements

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements concerning our business, operations and financial performance, as well as our plans, objectives and expectations for our business operations and financial performance and condition. All statements other than statements of historical or current facts included in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “design,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “positioned,” “potential,” “predict,” “seek,” “should,” “target,” “will,” “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. In addition, statements that “we believe” or similar statements reflect our beliefs and opinions on the relevant subject. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed in, or implied by these, forward-looking statements and therefore, you should not unduly rely on such statements, including, but not limited to:

our ability to raise additional capital to fund our operations and continue the development of our current and future product candidates;
our ability to recruit and retain key members of management and other clinical and scientific personnel;
the clinical nature of our business and our ability to successfully advance our current and future product candidates through our ongoing future clinical trials, preclinical studies and development activities;
our ability to generate revenue from future product sales and our ability to achieve and maintain profitability;
the accuracy of our projections and estimates regarding our expenses, capital requirements, cash utilization, and need for additional financing;
the expected uses of the net proceeds from our initial public offering, or IPO, in October 2021, and our existing cash and cash equivalents and the sufficiency of such resources to fund our planned operations;
the extent to which health epidemics and other outbreaks of communicable diseases, including the COVID-19 pandemic, geopolitical turmoil, including the ongoing conflict between Ukraine and Russia or increased trade restrictions between the United States, Russia, China, and other countries, social unrest, political instability, terrorism, or other acts of war could ultimately impact our business, including our ongoing and future clinical trials, preclinical studies and development activities;
our dependence on developmental and regulatory success and commercialization of CT1812, our lead product candidate;
the novelty of our approach to targeting the σ-2 (sigma-2) receptor complex to treat age-related degenerative diseases and disorders, and the challenges we will face due to the novel nature of such approach;
the success of competing therapies that are or become available;
the initiation, progress, success, cost, and timing of our ongoing and future clinical trials, preclinical studies and development activities;
our ability to obtain and maintain regulatory clearance of CT1812 for approved investigational new drug, or IND, applications and any future IND applications for any of our other product candidates;
the timing, scope and likelihood of regulatory filings and approvals, including final regulatory approval of our product candidates;

3

the performance of third parties in connection with the development of our product candidates, including third parties conducting our future clinical trials as well as third-party suppliers and manufacturers;
our ability to attract and retain strategic collaborators with development, regulatory, and commercialization expertise;
our ability to successfully commercialize our product candidates and develop sales and marketing capabilities, if our product candidates are approved;
the size and growth of the potential markets for our product candidates and our ability to serve those markets;
regulatory developments and approval pathways in the United States and foreign countries for our product candidates;
the potential scope and value of our intellectual property and proprietary rights;
our ability, and the ability of any future licensors, to obtain, maintain, defend, and enforce intellectual property and proprietary rights protecting our product candidates, and our ability to develop and commercialize our product candidates without infringing, misappropriating, or otherwise violating the intellectual property or proprietary rights of third parties;
developments relating to our competitors and our industry;
economic uncertainty resulting from actual or perceived inflation; and
other risk and uncertainties, including those described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, or Annual Report, filed with the Securities and Exchange Commission, or SEC, on March 30, 2022, as supplemented by our subsequent Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022.

We have based these forward-looking statements largely on our current expectations, estimates, forecasts, and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. In light of the significant uncertainties in these forward-looking statements, you should not rely upon forward-looking statements as predictions of future events. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur at all. You should refer to the section titled “Risk Factors” set forth in Part I, Item 1A of our Annual Report, as supplemented by our subsequent Quarterly Reports on Form 10-Q, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. Except as required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

You should read this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We intend the forward-looking statements contained in this Quarterly Report to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

4

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

COGNITION THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

As of

September 30, 2022

December 31, 2021

    

(unaudited)

Assets

 

  

  

Current assets

 

  

  

Cash and cash equivalents

$

46,610

$

54,721

Grant receivables

 

2,526

 

1,799

Prepaid expenses and other current assets

 

1,794

 

2,005

Other receivables

2

467

Total current assets

 

50,932

 

58,992

Property and equipment, net

 

246

 

145

Right-of-use assets, operating leases

691

Other assets

1,688

Total assets

$

53,557

$

59,137

Liabilities and Stockholders’ Equity

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

 

8,087

 

4,168

Accrued expenses

 

2,314

 

1,751

Deferred grant income, current

1,601

753

Operating lease liabilities, current

114

Other current liabilities

 

 

1,192

Total current liabilities

 

12,116

 

7,864

Operating lease liabilities, noncurrent

 

603

 

Deferred grant income and other liabilities, noncurrent

 

1,518

 

Total liabilities

 

14,237

 

7,864

Commitments and contingencies (Note 6)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.001 par value, 10,000,000 shares authorized; no shares issued and outstanding at September 30, 2022 and December 31, 2021

Common stock, $0.001 par value, 250,000,000 shares authorized; 23,969,497 and 22,230,032 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

 

24

 

22

Additional paid-in capital

 

149,716

 

145,453

Accumulated deficit

 

(110,219)

 

(94,004)

Accumulated other comprehensive loss

 

(201)

 

(198)

Total stockholders’ equity

 

39,320

 

51,273

Total liabilities and stockholders’ equity

$

53,557

$

59,137

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

5

COGNITION THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

(in thousands, except share and per share amounts)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2022

    

2021

    

2022

    

2021

Operating Expenses:

 

  

 

  

  

 

  

Research and development

$

8,268

$

3,675

$

23,884

$

12,999

General and administrative

 

4,357

 

1,548

 

10,367

 

3,791

Total operating expenses

 

12,625

 

5,223

 

34,251

 

16,790

Loss from operations

 

(12,625)

 

(5,223)

 

(34,251)

 

(16,790)

Other income (expense):

 

  

 

  

 

  

 

Grant income

 

5,947

 

3,037

 

18,236

 

12,375

Change in the fair value of the derivative liability

 

 

 

2,209

Change in the fair value of the Simple Agreements for Future Equity

 

(932)

(1,976)

Other (expense) income, net

 

55

 

8

 

(182)

256

Gain on debt extinguishment

 

 

 

443

Interest expense, net

 

(2)

 

 

(18)

(894)

Total other income, net

 

6,000

 

2,113

 

18,036

 

12,413

Net loss

 

(6,625)

 

(3,110)

 

(16,215)

 

(4,377)

Cumulative preferred stock dividends

 

 

(1,859)

 

 

(4,326)

Net loss attributable to common stockholders

$

(6,625)

$

(4,969)

$

(16,215)

$

(8,703)

Unrealized loss on foreign currency translation

 

(1)

 

(3)

 

(3)

 

(9)

Total comprehensive loss

$

(6,626)

$

(3,113)

$

(16,218)

$

(4,386)

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

$

(0.29)

$

(8.12)

$

(0.71)

$

(14.87)

Weighted-average common shares outstanding, basic and diluted

 

23,024,026

611,680

 

22,684,309

 

585,320

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

6

COGNITION THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(unaudited)

(in thousands, except share amounts)

Accumulated

Additional

Other

Total

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

  

Shares

  

Amount

  

Capital

  

Deficit

  

Loss

  

Deficit

Balances as of December 31, 2021

 

22,230,032

$

22

$

145,453

$

(94,004)

$

(198)

$

51,273

Exercise of stock options

348,552

303

303

Equity-based compensation

1,001

1,001

Other comprehensive loss

1

1

Net loss

(3,838)

(3,838)

Balances as of March 31, 2022

22,578,584

$

22

$

146,757

$

(97,842)

$

(197)

$

48,740

Exercise of stock options

19,323

22

 

22

Equity-based compensation

892

 

892

Other comprehensive loss

(3)

 

(3)

Net loss

(5,752)

 

(5,752)

Balances as of June 30, 2022

22,597,907

$

22

$

147,671

$

(103,594)

$

(200)

$

43,899

Exercise of stock options

1,371,590

2

1,268

1,270

Equity-based compensation

777

777

Other comprehensive loss

(1)

(1)

Net loss

(6,625)

(6,625)

Balances as of September 30, 2022

 

23,969,497

$

24

$

149,716

$

(110,219)

$

(201)

$

39,320

7

Series A

Series A1

Series A2

Series B

Series B-1

Accumulated

Convertible

Convertible

Convertible

Convertible

Convertible

Additional

Other

Total

Preferred Stock

Preferred Stock

Preferred Stock

Preferred Stock

Preferred Stock

Common Stock

Paid-in

Accumulated

Comprehensive

Stockholders’

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

  

Shares

  

Amount

Shares

  

Amount

  

  

Shares

  

Amount

  

Capital

  

Deficit

  

(Loss) Gain

  

Deficit

Balances as of December 31, 2020

 

2,819,027

$

4,616

 

3,730,366

$

5,398

 

3,565,063

$

5,809

 

30,409,890

$

39,547

$

 

538,793

$

1

$

222

$

(68,220)

$

(187)

$

(68,184)

Exercise of stock options

 

20,787

14

14

Equity-based compensation

98

98

Other comprehensive loss

 

(5)

(5)

Net income

223

223

Balances as of March 31, 2021

2,819,027

$

4,616

3,730,366

$

5,398

3,565,063

$

5,809

30,409,890

$

39,547

$

559,580

$

1

$

334

$

(67,997)

$

(192)

$

(67,854)

Exercise of common stock warrants

50,497

34

34

Equity-based compensation

94

94

Issuance of Series B-1 Convertible Preferred Stock upon conversion of debt

10,926,089

29,391

(397)

(14,068)

(14,465)

Other comprehensive loss

(1)

(1)

Net loss

(1,490)

(1,490)

Balances as of June 30, 2021

2,819,027

$

4,616

3,730,366

$

5,398

3,565,063

$

5,809

30,409,890

$

39,547

10,926,089

$

29,391

610,077

$

1

$

65

$

(83,555)

$

(193)

$

(83,682)

Exercise of stock options

4,996

5

 

5

Exercise of common stock warrants

834

Equity-based compensation

72

 

72

Other comprehensive loss

 

 

(3)

 

(3)

Net loss

 

(3,110)

 

(3,110)

Balances as of September 30, 2021

 

2,819,027

$

4,616

 

3,730,366

$

5,398

 

3,565,063

$

5,809

 

30,409,890

$

39,547

10,926,089

$

29,391

615,907

$

1

$

142

$

(86,665)

$

(196)

$

(86,718)

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

8

COGNITION THERAPEUTICS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net loss

$

(16,215)

$

(4,377)

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

 

  

 

  

Depreciation and amortization

 

60

 

70

Equity-based compensation

 

2,670

 

264

Amortization of right-of-use assets

115

Amortization of debt issuance costs

 

 

31

Amortization of debt discount

 

 

352

Change in the fair value of the derivative liability

 

 

(2,209)

Change in the fair value of the Simple Agreements for Future Equity

1,976

Gain on debt extinguishment

 

 

(443)

Changes in operating assets and liabilities:

 

 

Grant receivables

 

(727)

 

(283)

Prepaid expenses and other assets

 

(1,477)

 

(18)

Other receivables

 

465

 

264

Accounts payable

 

3,919

 

(278)

Accrued expenses

 

563

 

258

Deferred grant income, current and other liabilities

2,366

661

Operating lease liabilities

 

(88)

 

Net cash used in operating activities

 

(8,349)

 

(3,732)

Cash flows from investing activities:

 

 

Payments for property and equipment

 

(161)

Net cash used in investing activities

 

(161)

 

Cash flows from financing activities:

 

  

 

  

Proceeds from the exercise of common stock options

 

1,595

19

Payments on loan payable

(1,191)

Proceeds from issuance of Simple Agreements for Future Equity

8,942

Proceeds from exercise of stock warrants

 

34

Deferred offering costs

 

(2,155)

Net cash provided by financing activities

 

404

 

6,840

Effect of exchange rate changes on cash and cash equivalents

 

(5)

13

Net (decrease) increase in cash and cash equivalents

 

(8,111)

 

3,121

Cash and cash equivalents

Cash and cash equivalents – beginning of period

 

54,721

 

5,189

Cash and cash equivalents – end of period

$

46,610

$

8,310

Supplemental disclosures of non-cash financing activities:

 

  

 

  

Remeasurement of right-of-use asset and operating lease liability

$

189

$

Issuance of Series B-1 Convertible Preferred Stock upon conversion of debt

$

$

29,391

Deferred offering costs included in accounts payable

$

$

1,055

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

9

Cognition Therapeutics, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(unaudited)

(in thousands, except share and per share amounts)

1. Description of Business and Financial Condition

Cognition Therapeutics, Inc. (the “Company”) was incorporated as a Delaware corporation on August 21, 2007. The Company is a biopharmaceutical company developing disease modifying therapies for central nervous system (“CNS”) disorders. The Company’s pipeline candidates were discovered using proprietary biology and chemistry platforms designed to identify novel drug targets and disease-modifying therapies that address dysregulated pathways specifically associated with neurodegenerative diseases. The Company was founded on the unique combination of biological expertise around these targets, including proprietary assays that emphasize functional responses, and proprietary medicinal chemistry intended to produce novel, high-quality small-molecule drug candidates.

On July 14, 2015, the Company formed Cognition Therapeutics PTY LTD, as its wholly owned subsidiary (the “Subsidiary”), primarily for the purpose of conducting research and development efforts at facilities located in Australia. Assets and liabilities of the Subsidiary, which uses the Australian dollar as its local functional currency, are translated to United States (U.S.) dollars at year-end exchange rates. Income statement accounts are translated using the average exchange rates prevailing during the month in which income and expenses are generated. Translation adjustments are recorded to accumulated other comprehensive income (loss) (“AOCI”) within stockholders’ equity (deficit). Gains and losses from foreign currency transactions are included in net loss as a part of other income, net.

On October 13, 2021, the Company closed its initial public offering (“IPO”) of 3,768,116 shares of the Company’s common stock at a public offering price of $12.00 per share. The gross proceeds from the IPO, excluding the over-allotment exercise, were $45,217 and the net proceeds were approximately $37,909, after deducting underwriting discounts and commissions and other offering related expenses payable by the Company. Upon completion of the IPO, all of the Company’s then outstanding preferred stock was automatically converted into an aggregate of 15,906,537 shares of common stock and an aggregate amount of $8,942 of simple agreements for future equity (“SAFEs”) was automatically converted into an aggregate of 931,485 shares of common stock.

On November 10, 2021, the representative of the underwriters for the IPO provided notice to the Company that it had elected to exercise its over-allotment option in full to purchase 565,217 shares of the Company’s common stock. The representative’s exercise of the over-allotment option closed on November 12, 2021, resulting in gross proceeds of $6,783 and net proceeds to the Company of approximately $6,308, after deducting underwriting discounts and commissions and other offering related expenses.

The Company held cash and cash equivalents of $46,610 at September 30, 2022. The Company expects that its cash and cash equivalents, including the net proceeds from its IPO, will enable it to fund its operating expenses and capital expenditure requirements through at least the one year period subsequent to the filing date of this Quarterly Report on Form 10-Q. However, additional funding will be necessary beyond this point to fund the Company’s future preclinical and clinical activities. The Company expects to finance its future cash needs through a combination of grant awards, equity or debt financings, collaboration agreements, strategic alliances and licensing arrangements.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements as of September 30, 2022, and for the three and nine months ended September 30, 2022 and 2021, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the

10

opinion of the Company’s management, the accompanying unaudited interim consolidated financial statements contain all adjustments that are necessary to present fairly the Company’s financial position as of September 30, 2022, the statements of operations and comprehensive loss and convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. Such adjustments are of a normal and recurring nature. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022, or for any future period. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2021, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K, filed with the SEC on March 30, 2022.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of other income and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of interest-bearing deposits at various financial institutions. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Receivables

Grant Receivables

Grant receivables relate to outstanding amounts due for reimbursable expenditures of awarded grants issued by the National Institute of Aging, a division of the National Institute of Health (“NIH”) and are carried at their estimated collectible amounts. The Company expects all receivables to be collectible, and accordingly, there is no allowance for doubtful accounts required on these grant receivables.

Property and Equipment

Property and equipment is recorded at cost, less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful life of the asset. The Company estimates the useful life to be 5 and 6 years for equipment and furniture and fixtures, respectively. The cost of repairs and maintenance is charged to expense as incurred.

Property and equipment is evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. If expected cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the assets. There were no indicators of impairment of long-lived assets during the three or nine months ended September 30, 2022 or 2021.

Convertible Instruments

ASC 815, Derivatives and Hedging Activities (“ASC 815”) requires companies to bifurcate certain conversion options and redemption features from their host instruments and account for them as freestanding derivative financial instruments should certain criteria be met.

The Company also follows ASC 480-10, Distinguishing Liabilities from Equity (“ASC 480-10”) when evaluating the accounting for its hybrid instruments. A financial instrument that embodies an unconditional obligation, or a financial instrument other than an outstanding share that embodies a conditional obligation, that the issuer must or may

11

settle by issuing a variable number of its equity shares shall be classified as a liability (or an asset in some circumstances) if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following: (a) a fixed monetary amount known at inception; (b) variations in something other than the fair value of the issuer’s equity shares; or (c) variations inversely related to changes in the fair value of the issuer’s equity shares. Hybrid instruments meeting these criteria are not further evaluated for any embedded derivatives and are carried as a liability at fair value at each balance sheet date.

Grant income

For the three and nine months ended September 30, 2022, the Company generated grant income of $5,947 and $18,236, respectively, primarily from reimbursements from the National Institute of Aging (“NIA”), a division of the NIH, for aging research. For the three and nine months ended September 30, 2021, the Company generated grant income of $3,037 and $12,375, respectively, from reimbursements from the NIA. The Company records grant income in other income (expense) in the period in which the reimbursable research and development services are incurred and the right to payment is realized. The grants awarded relate to agreed upon direct and indirect costs for specific studies or clinical trials, which may include personnel and consulting costs, costs paid to contract research organizations (“CROs”), research institutions and/or consortiums involved in the grant, as well as facilities and administrative costs. These grants are cost plus fixed fee arrangements in which the Company is reimbursed for its eligible direct and indirect costs over time, up to the maximum amount of each specific grant award. Only costs that are allowable under the grant award, certain government regulations and the NIH’s supplemental policy and procedure manual may be claimed for reimbursement, and the reimbursements are subject to routine audits from governmental agencies from time to time. Deferred grant income represents grant proceeds received by the Company prior to the period in which the reimbursable research and development services are incurred. As of September 30, 2022, the Company has been awarded grants with project periods that extend through May 31, 2025, subject to extension.

Research and Development Costs

The Company is involved in research and development aimed at the development of treatments for a variety of diseases related to the central nervous system, with a primary focus on Alzheimer’s disease, dementia with Lewy Bodies and dry AMD studies. Research and development costs are expensed as incurred. Research and development expenses consist principally of personnel costs, including salaries, stock-based compensation, and benefits for employees, third-party license fees and other operational costs related to our research and development activities, including allocated facility-related expenses and external costs of outside vendors, and other direct and indirect costs. Non-refundable research and development costs are deferred and expensed as the related goods are delivered or services are performed. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks. Costs for certain research and development activities are recognized based on the pattern of performance of the individual arrangements, which may differ from the pattern of billings incurred, and are reflected in the consolidated financial statements as prepaid expenses or as accrued research and development expenses.

Leases

The Company adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) using the optional transition method of the modified retrospective approach, as of January 1, 2022. Accordingly, prior periods will not be restated to reflect the adoption of the standard. The Company elected the practical expedient to not apply the recognition requirements in the leasing standards to short-term leases (a lease that at commencement date has a lease term of 12 months or less and does not contain a purchase option that it is reasonably certain to exercise) and the practical expedient that permits lessees to make an accounting policy election (by class of underlying asset) to not separate lease components of a contract from non-lease components.

The Company determines if an arrangement is a lease at contract inception. The Company’s contracts are determined to contain a lease when all of the following criteria based on the specific circumstances of the arrangement are met: (1) there is an identified asset for which there are no substantive substitution rights; (2) the Company has the right to obtain substantially all of the economic benefits from the identified asset; and (3) the Company has the right to direct the use of the identified asset.

12

At the commencement date, operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The Company’s lease agreements do not provide an implicit rate. As a result, the Company utilizes an estimated incremental borrowing rate to discount lease payments, which is based on the rate of interest the Company would have to pay to borrow a similar amount on a collateralized basis over a similar term. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or lease incentives received. Operating lease cost is recognized over the expected term on a straight-line basis. Variable lease cost is recognized as incurred. The expected lease term for those leases commencing prior to January 1, 2022 did not change with the adoption of the new leasing standards.

As a result of the adoption of the new leasing standard, on January 1, 2022, the Company recorded a right-of-use asset of $616 and operating lease liabilities of $616. The adoption did not have a material impact on the condensed consolidated statement of operations or cash flows. For additional information on the adoption of the new leasing standard, refer to Note 6. The Company will continue to report financial information for fiscal years ended before December 31, 2021 under ASC 840.

Impact of Adoption of ASC 842 on the Consolidated Financial Statements

Prior to adoption

Adjustment for

of new leasing

adoption of new

standards

leasing standards

As adjusted

Right-of-use assets (1)

$

$

616

$

616

Deferred rent (2)

$

6

$

(6)

$

Operating lease liabilities (3)

$

$

130

$

130

Operating lease liabilities, net of current portion (3)

$

$

486

$

486

(1) Represents recognition of operating lease right-of-use assets.

(2) Represents reclassification of deferred rent to operating lease.

(3) Represents recognition of operating lease liabilities.

Equity-based Compensation

Following the provisions of ASC 718, Compensation — Stock Compensation, the Company recognizes compensation expense for equity-based grants using the straight-line attribution method, in which the expense is recognized ratably over the requisite service period within operating expenses based on the grant date fair value. The Company also has granted awards subject to performance-based vesting. The Company would recognize compensation expense for these awards commencing in the period in which the vesting condition becomes probable of achievement. Grant date fair value is estimated on the date of grant using the Black-Scholes option pricing model. Forfeitures are recognized in the period in which they occur.

Black-Scholes requires inputs based on certain subjective assumptions, including (i) the expected stock price volatility, (ii) the expected term of the award, (iii) the risk-free interest rate and (iv) expected dividends. Due to a lack of sufficient public market data for the Company’s common stock and lack of company-specific historical and implied volatility data, the Company has based its computation of expected volatility on the historical volatility of a representative group of public companies with similar characteristics to the Company, including stage of product development and life science industry focus. The historical volatility is calculated based on a period of time commensurate with expected term assumption. The Company uses the simplified method to calculate the expected term for stock options granted to employees whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the stock options due to its lack of sufficient historical data. The risk-free interest rate is based on U.S. Treasury securities with a maturity date commensurate with the expected term of the associated award. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.

13

Prior to the IPO, due to the absence of an active market for the Company’s common stock, the Company utilized methodologies 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, to estimate the fair value of its common stock. In determining the exercise prices for stock options granted, the Company has considered the estimated fair value of the common stock as of the measurement date. The estimated fair value of the common stock has been determined at each grant date based upon a variety of factors, including the illiquid nature of the common stock, arm’s-length sales of the Company’s capital stock (including convertible preferred stock), the effect of the rights and preferences of the preferred stockholders and the prospects of a liquidity event. Among other factors are the Company’s financial position and historical financial performance, the status of technological developments within the Company’s research, the composition and ability of the current research and management team, an evaluation or benchmark of the Company’s competition and the current business climate in the marketplace. Significant changes to the key assumptions underlying the factors used could result in different fair values of common stock at each valuation date. Subsequent to the IPO, the board of directors determines the fair value of the shares of common stock underlying the stock-based awards based upon the closing price as reported on the Nasdaq Global Market on the grant date.

Concentration of Credit Risk

The Company’s financial instruments that are exposed to credit risks consist of cash and cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed the federally insured limit. The Company has not experienced any losses in these accounts and does not believe it is exposed to any significant credit risk related to these funds.

Fair Value of Financial Instruments

The Company applies ASC 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in the Company’s principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best information available in the circumstances.

The carrying value of the Company’s cash and cash equivalents, grants receivable, prepaid expense, other receivables, other current assets, accounts payable, accrued expenses, deferred grant income, and other current liabilities approximate fair value because of the short-term maturity of these financial instruments. In addition, the Company records its derivative liability and SAFEs at fair value.

The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below:

Level 1 — Assets and liabilities with unadjusted, quoted prices listed on active market exchanges. Inputs to the fair value measurement are observable inputs, such as quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs to the fair value measurement are determined using prices for recently traded assets and liabilities with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — Inputs to the fair value measurement are unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities.

14

Net Loss Per Share Attributable to Common Stockholders

Basic net loss attributable to common shares is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during each period. Diluted net loss attributable to common shares includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock and stock options, which would result in the issuance of incremental shares of common stock. For diluted net loss attributable to common stockholders, the weighted-average number of shares of common stock is the same for basic net loss attributable to common stockholders, due to the fact that when a net loss exists, dilutive securities are not included in the calculation as the impact is anti-dilutive. The Company’s convertible preferred stock entitles the holder to participate in dividends and earnings of the Company, and, if the Company were to recognize net income, it would have to use the two-class method to calculate earnings per share. The two-class method is not applicable during periods with a net loss, as the holders of the convertible preferred stock have no obligation to fund losses.

Segments

The Company has determined that it operates and manages one operating segment, which is the business of developing and commercializing therapeutics. The Company’s chief operating decision maker, its chief executive officer, reviews financial information on an aggregate basis for the purpose of allocating resources.

Emerging Growth Company Status

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

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The Company adopted ASU 2016-02 on January 1, 2022. For additional information on the adoption of the new leasing standards, please refer to section titled “Leases” above, and Note 6.

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. This ASU clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 is effective for fiscal years beginning after December 15, 2021, with early adoption permitted for all entities. The Company adopted ASU 2021-04 as of the reporting period beginning January 1, 2022. The adoption of this update did not have a material effect on the Company’s financial statements.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. This ASU increases the transparency of government assistance including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The disclosure requirements can be applied either retrospectively or prospectively to

15

all transactions in the scope of the amendments that are reflected in the financial statements at the date of initial application and new transactions entered into after the date of initial application. The Company adopted ASU 2021-10 prospectively as of the reporting period beginning January 1, 2022. The adoption of this update and the additional annual disclosure requirements are not expected to have a material effect on the Company’s financial statements.

Reverse Stock Split

In July 2021, the Company's board of directors approved an amendment to the Company's second amended and restated certificate of incorporation to effect a 1-for-3.2345 reverse stock split of the Company's common stock, which was effected on October 1, 2021 with a filing made with the Secretary of State of the State of Delaware. Stockholders entitled to fractional shares as a result of the reverse stock split received a cash payment in lieu of receiving fractional shares. The par value of the common stock was not adjusted as a result of the reverse stock split. Shares of common stock underlying outstanding stock options and other equity instruments were proportionately reduced and the respective exercise prices, if applicable, were proportionately increased in accordance with the terms of the appropriate securities agreements. Shares of common stock reserved for issuance upon the conversion of our convertible preferred stock were proportionately reduced and the respective conversion prices were proportionately increased. All shares of common stock and per share data have been retrospectively revised to reflect the reverse stock split.

Income taxes

In accordance with ASC 270, Interim Reporting, and ASC 740, Income Taxes, the Company is required at the end of each interim period to determine the best estimate of its annual effective tax rate, apply that rate in providing for income taxes on a current year-to-date (interim period) basis, and include the tax impact for discrete items within the interim period. The Company maintains a full valuation allowance against all deferred tax assets as of September 30, 2022 and December 31, 2021, as management has determined that it is not more likely than not that the Company will realize these future tax benefits. As of September 30, 2022 and December 31, 2021, the Company had no uncertain tax positions.

3. Financial Instruments and Fair Value Measurements

Financial assets and liabilities measured at fair value are summarized below:

As of September 30, 2022

Significant

Quoted Priced in

Significant Other

Unobservable

Active Markets

Observable Inputs

Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

 

  

 

  

 

  

 

  

Money market funds

$

42,260

$

$

$

42,260

Total assets

$

42,260

$

$

$

42,260

As of December 31, 2021

Significant

Quoted Priced in

Significant Other

Unobservable

Active Markets

Observable Inputs

Inputs

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Assets:

 

  

 

  

 

  

 

  

Money market funds

$

46,687

$

$

$

46,687

Total assets

$