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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 September 30, 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 ☐ Non-Accelerated Filer
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 November 8, 2023 was 26,717,676.

 

 

 

 

 

 

GENELUX CORPORATION

FORM 10-Q

September 30, 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 22
Item 3 Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Control and Procedures 34
     
PART II— OTHER INFORMATION 35
     
Item 1 Legal Proceedings 35
Item 1A Risk Factors 35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 108
Item 3. Defaults Upon Senior Securities 109
Item 4. Mine Safety Disclosures 109
Item 5. Other Information 109
Item 6. Exhibits 109
     
SIGNATURES 110

 

2

 

 

Genelux Corporation

Condensed Balance Sheets

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

 

   2023   2022 
   September 30,   December 31, 
   2023   2022 
   (Unaudited)     
ASSETS          
Current Assets          
Cash and cash equivalents  $29,869   $397 
Prepaid expenses and other current assets   1,310    1,495 
Total Current Assets   31,179    1,892 
           
Property and equipment, net   1,022    644 
Right of use assets   1,779    1,335 
Deferred offering costs   -    1,568 
Other assets   92    92 
Total Other Assets   2,893    3,639 
           
TOTAL ASSETS  $34,072   $5,531 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)          
Current Liabilities          
Accounts payable and accrued expenses  $4,009   $6,775 
Accrued payroll and payroll taxes   4,101    2,852 
Accrued interest payable   -    1,178 
Accrued interest payable - director and shareholders   38    3,817 
Deferred revenue   -    170 
Warrant liabilities   -    169 
Lease liability, current portion   567    266 
Notes payable - shareholders, net of debt discount of $108 in 2022   -    992 
Convertible notes payable - shareholders, current portion, including $40 and $105 past due, respectively   40    15,407 
Total Current Liabilities   8,755    31,626 
           
Long-term Liabilities          
Lease liability, long-term portion   1,289    1,164 
Convertible notes payable, net of debt discount of $541 in 2022   -    8,524 
Total Long-term Liabilities   1,289    9,688 
           
Total Liabilities   10,044    41,314 
           
Shareholders’ Equity (Deficit)          
Preferred stock, Series A through K, par value $0.001, 10,000,000 shares authorized as of 9/30/2023 and 29,927,994 authorized as of 12/31/2022; no shares and 22,094,889 shares issued and outstanding, respectively;   -    22 
Common stock, par value $0.001, 200,000,000 shares authorized; 26,657,906 and 9,126,726 shares issued and outstanding, respectively   27    9 
Treasury stock, 433,333 shares, at cost   (433)   (433)
Additional paid-in capital   239,189    154,401 
Accumulated other comprehensive income   2    2 
Accumulated deficit   (214,757)   (189,784)
Total Shareholders’ Equity (Deficit)   24,028    (35,783)
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)  $34,072   $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   2023   2022 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
   (Unaudited)   (Unaudited) 
                 
Revenues  $-   $11,000   $170   $11,000 
                     
Operating expenses:                    
Research and development   2,819    2,414    8,607    6,610 
General and administrative   2,488    2,242    8,727    4,309 
Total operating expenses   5,307    4,656    17,334    10,919 
                     
Income (loss) from operations   (5,307)   6,344    (17,164)   81 
                     
Other income (expenses):                    
Interest income   4    -    4    - 
Interest expense   -    (286)   (167)   (859)
Debt discount amortization   -    (49)   (649)   (148)
Financing costs   (42)   -    (3,152)   - 
Debt extinguishment costs   -    -    (402)   - 
Gain on forgiveness of PPP loan payable   -    -    -    314 
Total other expenses, net   (38)   (335)   (4,366)   (693)
                     
Income (loss) before provision for foreign income taxes   (5,345)   6,009    (21,530)   (612)
Provision for foreign income taxes   -    (1,100)   -    (1,100)
                     
NET INCOME (LOSS)  $(5,345)  $4,909   $(21,530)  $(1,712)
                     
INCOME (LOSS) PER COMMON SHARE - BASIC  $(0.20)  $0.54   $(0.91)  $(0.19)
                     
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - BASIC   26,210,068    9,117,596    23,640,995    9,113,039 
                     
INCOME (LOSS) PER COMMON SHARE - DILUTED  $(0.20)  $0.49   $(0.91)  $(0.19)
                     
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - DILUTED   26,210,068    10,073,788    23,640,995    9,113,039 

 

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

 

4

 

 

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, June 30, 2023 (unaudited)   -   $-    25,855,511   $26    (433,333)  $(433)  $232,073   $2   $(209,412)  $22,256 
                                                   
Stock compensation   -    -    -    -    -    -    515    -    -    515 
                                                                       
Issuance of common shares upon the closing of private financings, net of offering costs   -    -    175,000    -    -    -    3,500    -    -    3,500 
                                                   
Fair value of vested restricted stock units   -    -    113,500    -    -    -    147    -    -    147 
                                                   
Cost of stock option repricing   -    -    -    -    -    -    25    -    -    25 
                                                   
Fair value of warrants issued in connection with the the conversion of convertible notes payable   -    -    -    -    -    -    42    -    -    42 
                                                   
Issuance of common shares upon exercise of stock options   -    -    207,303    -    -    -    1,321    -    -    1,321 
                                                   
Issuance of common shares upon exercise of stock warrants   -    -    306,592    1    -    -    1,566    -    -    1,567 
                                                   
Net loss during the three months ended September 30, 2023   -    -    -    -    -    -    -    -    (5,345)   (5,345)
                                                   
Balance, September 30, 2023 (unaudited)   -   $-    26,657,906    27    (433,333)  $(433)  $239,189   $2   $(214,757)  $24,028 
                                                   
Balance, December 31, 2022   22,094,889   $22    9,126,726   $9    (433,333)  $(433)  $154,401   $2   $(189,784)  $(35,783)
                                                   
Stock compensation   -    -    -    -    -    -    982    -    -    982 
                                                   
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 the closing of private financings, net of offering costs   -    -    1,292,079    2    -    -    25,140    -    -    25,142 
                                                   
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    4    -    -    29,892    -    -    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   -    -    113,500    -    -    -    774    -    -    774 
                                                   
Cost of stock option repricing   -    -    -    -    -    -    2,667    -    -    2,667 
                                                   
Reclassification of warrant liabilities upon the closing of the initial public offering   -    -    -    -    -    -    169    -    -    169 
                                                   
Fair value of warrants issued in connection with the the conversion of convertible notes payable   -    -    -    -    -    -    3,152    -    -    3,152 
                                                   
Conversion of notes payable-shareholders and accrued interest   -    -    73,134    -    -    -    1,865    -    -    1,865 
                                                   
Issuance of common shares upon exercise of stock options   -    -    207,303    -    -    -    1,321    -    -    1,321 
                                                   
Issuance of common shares upon exercise of stock warrants   -    -    430,086    1    -    -    2,740    -    -    2,741 
                                                   
Net loss during the nine months ended September 30, 2023   -    -    -    -    -    -    -    -    (21,530)   (21,530)
                                                   
Balance, September 30, 2023 (unaudited)   -   $-    26,657,906   $27    (433,333)  $(433)  $239,189   $2   $(214,757)  $24,028 
                                                   
Balance, June 30, 2022 (unaudited)   22,094,889   $22    9,113,393   $9    (433,333)  $(433)  $152,535   $2   $(191,198)  $(39,063)
                                                   
Stock compensation   -    -    -    -    -    -    1,703    -    -    1,703 
                                                   
Shares issued upon exercise of stock warrant   -    -    13,333    -    -    -    120    -    -    120 
                                                   
Net income during the three months ended September 30, 2022   -    -    -    -    -    -    -    -    4,909    4,909 
                                                   
Balance, September 30, 2022 (unaudited)   22,094,889   $22    9,126,726   $9    (433,333)  $(433)  $154,358   $2   $(186,289)  $(32,331)
                                                   
Balance, December 31, 2021   22,094,889   $22    9,110,060   $9    (433,333)  $(433)  $151,866   $2   $(184,577)  $(33,111)
                                                   
Stock compensation   -    -    -    -    -    -    2,372    -    -    2,372 
                                                   
Shares issued upon exercise of stock warrants   -    -    16,666    -    -    -    120    -    -    120 
                                                   
Net loss during the nine months ended September 30, 2022   -    -    -    -    -    -    -    -    (1,712)   (1,712)
                                                   
Balance, September 30, 2022 (unaudited)   22,094,889   $22    9,126,726   $9    (433,333)  $(433)  $154,358   $2   $(186,289)  $(32,331)

 

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

 

5

 

 

Genelux Corporation

Condensed Statements of Cash Flows

(In thousands)

 

   2023   2022 
   Nine Months Ended 
   September 30, 
   2023   2022 
   (Unaudited) 
Cash Flows from Operating Activities          
Net loss  $(21,530)  $(1,712)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation expense   404    415 
Right-of-use assets   413    309 
Amortization of debt discount   649    148 
Stock compensation   982    2,372 
Fair value of restricted stock units   774    - 
Cost of stock option repricing   2,667    - 
Debt extinguishment costs   402    - 
Fair value of warrants issued in connection with the the conversion of convertible notes payable   3,152    - 
Gain on forgiveness of PPP loan payable   -    (314)
Changes in Assets and Liabilities          
(Increase) Decrease in:          
Prepaid expenses and other assets   185    (164)
(Decrease) Increase in:          
Accounts payable and accrued expenses   (2,133)   890 
Accrued payroll and payroll taxes   1,249    92 
Accrued interest payable   22    634 
Deferred revenue   (170)   (4,440)
Lease liability   (431)   (283)
Net cash used in operating activities   (13,365)   (2,053)
           
Cash Flows from Investing Activities          
Purchases of property and equipment   (782)   (49)
Net cash used in investing activities   (782)   (49)
           
Cash Flows from Financing Activities          
Proceeds from notes payable - shareholders   900    - 
Repayment of notes payable - shareholders   (685)   - 
Repayment of convertible notes payable - shareholders   -    (130)
Payment of deferred offering costs   (303)   (1,013)
Proceeds from the exercise of stock options   1,321    - 
Proceeds from the exercise of stock warrants   2,741    120 
Proceeds from common stock issued for cash in connection with the closing of the IPO   14,503    - 
Proceeds from common stock issued for cash in connection with the closing of private financings   25,142    - 
Net cash provided by (used in) financing activities   43,619    (1,023)
           
Net increase (decrease) in cash and cash equivalents   29,472    (3,125)
           
Cash and cash equivalents at beginning of period   397    4,495 
Cash and cash equivalents at end of period  $29,869   $1,370 
           
Supplemental cash flows disclosures:          
Interest paid  $72   $224 
Taxes paid  $-   $- 
           
Supplemental non-cash financing disclosures:          
Effect of the extension of right-of-use assets and operating leases  $845   $686 
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   $- 
Conversion of notes payable-shareholders and accrued interest to shareholders’ equity  $1,463   $- 

 

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

 

6

 

 

GENELUX CORPORATION

NOTES TO FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

 

Liquidity and Capital Resources

 

The accompanying condensed 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.

 

During the year ended December 31, 2022, the Company incurred a net loss of $5,207 and used cash in operations of $3,571 and had a shareholders’ deficit of $35,783 as of December 31, 2022. As reflected in the accompanying condensed financial statements, during the nine months ended September 30, 2023, the Company incurred a net loss of $21,530 and used cash in operations of $13,365.

 

During the nine months ended September 30, 2023, the Company closed its initial public offering (“IPO”) and the two Private Placements (see Note 9) and received $37,774 of net proceeds from these offerings. At September 30, 2023, the Company had cash and cash equivalents on hand in the amount of $29,869. The Company also received commitments through the Private Placements for the funding of an additional $24,000. Initially the additional funds were to be received by November 15, 2023, but, in November 2023, the Company agreed to extend the funding deadline for $2,000 of the remaining committed investment amounts to March 31, 2024. The investor who was obligated to fund $22,000 of the remaining committed investment amounts has not made such payments and has indicated that he does not intend to comply with his investment commitments through the Private Placements. We are currently evaluating our potential remedies with respect to this investor’s non-compliance with his contractual obligations to us. Due to the funds received through these offerings, and the conversion of preferred stock and convertible notes payable upon the closing of the IPO, the Company had shareholders’ equity of $24,028 at September 30, 2023. The Company expects its cash on hand at September 30, 2023 will last for at least the next 12 months.

 

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.

 

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.

 

7

 

 

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.

 

For the nine months ended September 30, 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:

 

   September 30,
2023
   September 30,
2022
 
Convertible notes payable   -    3,367,486 
Common stock equivalent of Series A through K convertible preferred stock   -    7,567,630 
Stock options   5,097,654    4,201,018 
Stock warrants   688,574    738,412 
Restricted stock units   57,900    - 
Stock warrants, issuable in connection with convertible notes payable   180    183,852 
Total   5,844,308    16,058,398 

 

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

 

8

 

 

  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 nine months ended September 30, 2023, the Company shipped the product to Newsoara and thus recognized the revenue.

 

Cash Equivalents

 

During the three and nine months ended September 30, 2023, the Company invested cash into money market funds. The total amount held in the money market funds at September 30, 2023 was $2,254. The underlying securities in the money market funds held by the Company are all government backed securities.

 

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 nine months ended September 30, 2023, the Company incurred an additional $303 of costs. During the nine months ended September 30, 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.

 

9

 

 

Money market funds were valued by the Company using quoted prices in active markets for similar securities, which represent a Level 2 measurement within the fair value hierarchy. Cash equivalents consisted of money market funds at September 30, 2023.

 

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.

 

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.

 

10

 

 

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 September 30, 2023 and December 31, 2022:

 

   September 30,
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   782    - 
Property and equipment, gross   4,376    3,594 
Less: accumulated depreciation and amortization   (3,354)   (2,950)
           
Property and equipment, net  $1,022   $644 

 

Depreciation expense for the nine months ended September 30, 2023 and 2022 was $404 and $415, respectively.

 

NOTE 4 – ACCRUED PAYROLL AND PAYROLL TAXES

 

As of 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 in the amount of $2,852. During the nine months ended September 30, 2023, the Company repaid $385 of the amounts that were accrued. In addition, during the period, the Company recorded a payroll tax liability of $1,436 relating to stock option exercises. As of September 30, 2023, a total of $4,101 was owed to employees for these past due balances, and for current accrued payroll and payroll taxes, and other compensation related benefits.

 

11

 

 

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, through September 2028, 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. Effective July 2023, the Company extended the lease for an additional two-year period, through September 2030, 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 $701. On the date of the extension, the Company determined that the value of the new right of use asset and lease liability was $909, respectively, using a discount rate of 7.00%. As such, the Company recorded an increase in the lease liability of $208 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 the 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 nine months ended September 30, 2023 and 2022, the Company made combined aggregate payments of $431 and $283, respectively, towards the lease liabilities. As of September 30, 2023 and December 31, 2022, the combined lease liability amounted to $1,856 and $1,430, 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 nine months ended September 30, 2023 and 2022, the Company reflected combined amortization of the right of use assets of $413 and $309, respectively, related to the leases, resulting in a combined net asset balance of $1,779 and $1,335 as of September 30, 2023 and December 31, 2022, respectively.

 

Other Leases

 

In November 2019, the Company entered into a short-term lease agreement for one of its office facilities, which was subsequently extended until December 2022 and is currently on a month-to-month basis. Rent expense was $27 during the nine months ended September 30, 2023 and 2022, respectively.

 

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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 nine months ended September 30, 2023, the Company extended the due date on the notes until April 30, 2023. During the nine months ended September 30, 2023, the Company borrowed an additional $900 from its shareholders, repaid $600 of principal and $11 of accrued interest, and $1,400 of principal and $63 of accrued interest was converted into 73,134 shares of the Company’s common stock with a fair value of $1,865. The notes accrued interest of $69 during the nine-month period. As of September 30, 2023, there was no outstanding principal and accrued and unpaid interest owed on the notes. Upon conversion of the notes payable, the Company incurred a debt extinguishment cost of $402, as the conversion price was lower than the fair value of the shares on the conversion date. This amount was recorded as debt extinguishment costs in the Statements of Operations during the nine months ended September 30, 2023.

 

In consideration for the notes issued in 2022, 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 2022 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 nine months ended September 30, 2023, the Company amortized $108 of debt discount, leaving no unamortized balance at September 30, 2023.

 

NOTE 7 – CONVERTIBLE NOTES PAYABLE – SHAREHOLDERS

 

Convertible notes payable to shareholders consisted of the following as of September 30, 2023 and December 31, 2022:

 

   September 30,
2023
   December 31,
2022
 
Convertible notes payable - shareholders (a) $40   $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   40    15,407 
Less: current portion   (40)   (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 nine months ended September 30, 2023, $60 of principal and $36 of accrued and unpaid interest were paid on the notes, and the notes accrued interest of $15. 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.
   
  During the nine months ended September 30, 2023, the Company repaid $25 of principal and $20 of accrued interest on the notes payable. As of September 30, 2023, total principal of $40 and total accrued and unpaid interest of $38 was owed on the notes. The remaining note accrues interest at 8% per annum, is unsecured and is 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 nine months ended September 30, 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 September 30, 2023, no principal, interest or loan fees was due on the notes.

 

(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.
   
  As of December 31, 2022, total principal of $700 and total accrued and unpaid interest of $164 was owed on the notes. During the nine months ended September 30, 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 September 30, 2023, no principal or interest was due on the notes.
   
(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.
   
  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 nine months ended September 30, 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.

 

14

 

 

  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 September 30, 2023, no principal or interest was due on the notes. During the nine months ended September 30, 2023, the Company issued the shareholders stock warrants to purchase up to 217,771 shares of the Company’s common stock at exercise prices of $9.00 and $10.50. All of the warrant shares were exercised during the nine months ended September 30, 2023, except for 180 shares (see Note 9).

 

NOTE 8 – CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following as of September 30, 2023 and December 31, 2022:

 

   September 30,
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. Subsequent to September 30, 2023, all of the warrant shares were exercised with a cashless exercise and the Company issued 70,265 shares of its common stock to the note holder relating to the exercise (see Note 11).

 

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 nine months ended September 30, 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 nine months ended September 30, 2023, the Company amortized $541 of debt discount, leaving no unamortized balance at September 30, 2023.

 

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 September 30, 2023, no principal or interest was due on the notes.

 

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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.

 

In January 2023, the Company’s Certificate of Incorporation with the state of Delaware was amended to change the number of authorized preferred shares from 29,927,994 to 10,000,000.

 

Common Stock

 

Authorized Shares

 

The Company’s Certificate of Incorporation authorizes the Company to issue up to 200,000,000 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 September 30, 2023 and December 31, 2022, there were 26,657,906 and 9,126,726 shares of common stock issued and outstanding, respectively.

 

In January 2023, the Company’s Certificate of Incorporation with the state of Delaware was amended to change the number of authorized common shares from 75,000,000 to 200,000,000.

 

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

 

On January 30, 2023, the Company completed its underwritten 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.

 

16

 

 

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

 

On May 12, 2023, the Company entered into a securities purchase agreement (the “PIPE 1 SPA”) with certain investors (the “PIPE 1 Purchasers”), pursuant to which the Company agreed to sell and issue 1,665,213 shares of its common stock in a private placement transaction (the “First Private Placement”). The purchase price per share of common stock was $20.00 per share. The initial closing of the First Private Placement occurred in May 2023 (the “PIPE 1 Initial Closing”) subject to customary closing conditions. The total gross proceeds to the Company at the PIPE 1 Initial Closing from the First Private Placement are expected to be approximately $33,300, including $1,463 from the cancellation of certain of the Company’s bridge loans and accrued interest (see Note 6). Two of the PIPE 1 Purchasers were contractually obligated to fund up to $17,500 of such PIPE 1 Purchasers’ investment amounts following the PIPE 1 Initial Closing but no later than November 15, 2023. During the nine months ended September 30, 2023, the Company received $6,000 of the committed amount of $17,500. As of September 30, 2023, the Company sold 1,017,079 shares of its common stock under the PIPE 1 SPA resulting in gross and net proceeds to the Company of $20,342 and $19,842, respectively.

 

On June 9, 2023, the Company entered into another securities purchase agreement (the “PIPE 2 SPA”, and, together with the PIPE 1 SPA, the “Purchase Agreements”) with certain investors (the “PIPE 2 Purchasers”), pursuant to which the Company agreed to sell and issue 900,000 shares of the Company’s common stock in a private placement transaction (the “Second Private Placement”, and, together with the First Private Placement, the “Private Placements”). The purchase price per share of Common Stock was $20.00 per share. The initial closing of this Second Private Placement occurred in June 2023 (the “PIPE 2 Initial Closing”), subject to customary closing conditions. The total gross proceeds to the Company from the Second Private Placement are expected to be approximately $18,000. One of the PIPE 2 Purchasers was contractually obligated to fund up to $12,500 of such PIPE 2 Purchaser’s investment amounts following the PIPE 2 Initial Closing, but no later than November 15, 2023. As of September 30, 2023, the Company sold 275,000 shares of its common stock under the PIPE 2 SPA resulting in gross and net proceeds to the Company of $5,500 and $5,300, respectively.

 

As of September 30, 2023, the Company sold 1,292,079 shares of its common stock under the Purchase Agreements resulting in the total gross and net proceeds to the Company from the First Private Placement and the Second Private Placement of $25,842 and $25,142, respectively. As of that same date, the Company had received $6,000 of the $30,000 in aggregate committed investment amounts to be funded following the PIPE 1 Initial Closing and PIPE 2 Initial Closing.

 

In November 2023, we agreed to extend the funding deadline for $2,000 of the remaining committed investment amounts to March 31, 2024. The investor who was obligated to fund $22,000 of the remaining committed investment amounts has not made such payments and has indicated that he does not intend to comply with his investment commitments under the Purchase Agreements. We are currently evaluating our potential remedies with respect to this investor’s non-compliance with his contractual obligations to us.

 

Grant of Restricted Stock Units

 

The following table summarizes restricted common stock activity during the nine months ended September 30, 2023:

           Weighted 
   Number of       Average Grant 
   Restricted       Date Fair 
   Shares   Fair Value   Value 
Non-vested, December 31, 2022   -   $-    - 
Granted   171,400    2,043    11.92 
Vested   (113,500)   (774)   6.57 
Forfeited   -    -    - 
Non-vested, September 30, 2023   57,900   $1,269   $22.40 

 

On February 17, 2023, the Company’s Board of Directors approved the issuance of a combined total of 113,500 restricted shares (RSU) of the Company’s common stock to certain of its officers, directors and consultants. The fair value of the shares on the date of grant was $746. All of the shares vested and were issued to the RSU holders during the three and nine months ended September 30, 2023. The RSU shares were granted under the Company’s 2022 Equity Incentive Plan.

 

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During the nine months ended September 30, 2023, the Company’s Board of Directors approved the issuance of a combined total of 57,900 restricted shares of the Company’s common stock to certain of its employees and directors. The fair value of the shares on the date of grant was $1,297. All of the shares vest in one to four years. The RSU shares were granted under the Company’s 2022 Equity Incentive Plan. As none of the shares vested during the nine months ended September 30, 2023, no shares were issued relating to the grant.

 

During the nine months ended September 30, 2023, the Company recorded $774 of stock compensation for the fair value vesting of restricted common stock, and as of September 30, 2023, $1,269 of unamortized compensation remained.

 

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 September 30, 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 September 30, 2023, a total of 1,632,314 shares were available for grant under the 2019 plan.

 

In June 2022, the Company’s Board of Directors approved the adoption of the 2022 Equity Incentive Plan (“the 2022 Plan”). The 2022 Plan provides for the grant of incentive stock options (ISOs), to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options (NSOs), 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 our affiliates. The 2022 Plan is a successor to the 2019 Plan. No further grants will be made under the 2019 Plan. The maximum number of shares of the Company’s common stock under the 2022 Plan that may be issued is 2,800,000 shares. 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 our 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. During the nine months ended September 30, 2023, a total of 659,638 option shares of the Company’s common stock, with a fair value of $12,359, were granted under the 2022 Plan, along with 113,500 RSU shares. As of September 30, 2023, a total of 2,026,862 shares were available for grant under the 2022 plan.

 

In September 2023, the Company’s Board of Directors approved the adoption of the Company’s 2023 Inducement Plan (the “Inducement Plan”) to reserve 1,000,000 shares of the Company’s common stock to be used exclusively for grants of awards to individuals that were not previously employees or directors of the Company as an inducement material to the individual’s entry into employment with the Company. The Inducement Plan provides for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance-based cash and stock awards, and other stock-based awards. In addition, forms of (i) Stock Option Grant Notice, Stock Option Agreement and Notice of Exercise and (ii) Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement, for both (a) executive officers and (b) employees at or below the vice president level, were adopted and approved for use with the Inducement Plan. The terms and conditions of the Inducement Plan are substantially similar to the Company’s stockholder-approved 2022 Equity Incentive Plan. During the nine months ended September 30, 2023, a total of 444,300 shares of the Company’s common stock, with a fair value of $8,031, were granted under the Inducement Plan. As of September 30, 2023, a total of 555,700 shares were available for grant under the Inducement plan.

 

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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.

 

Stock Option Grants during the Nine Months Ended September 30, 2023

 

During the nine months ended September 30, 2023, under its 2022 Plan and Inducement Plan, the Company’s Board of Directors approved the granting of options to certain employees and directors to purchase 1,103,938 shares of its common stock with an exercise price of $22.40 per share. The options vest over various periods, but none longer than four years, expire ten years from the date of grant and had an aggregate fair value of $20,390 at the date of grant.

 

The assumptions used for the options granted during the nine months ended September 30, 2023 are as follows:

Exercise price  $22.40 
Expected dividends    
Expected volatility   100.0%
Risk free interest rate   4.4%
Expected life of options   5.5 - 6.3 

 

During the nine months ended September 30, 2023, the Company recorded $982 of stock compensation for the value of all options vesting during the period. As of September 30, 2023, unvested compensation of $21,385 remained that will be amortized over the remaining vesting periods, through September 2027. The aggregate intrinsic value for option shares outstanding at September 30, 2023 was $73,438.

 

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.

 

The table below summarizes the Company’s stock option activities for the nine months ended September 30, 2023:

       Exercise   Weighted 
   Number of   Price Range   Average 
   Option Shares   Per Share   Exercise Price 
Balance, December 31, 2022   4,201,019   $6.00 - 10.50   $6.09 
Granted   1,103,938    22.40    22.40 
Cancelled            
Exercised   (207,303)   6.0010.50    6.39 
Expired            
Balance, September 30, 2023   5,097,654   $6.00 - 22.40   $9.61 
Vested and exercisable, September 30, 2023   3,828,435   $6.00 - 10.50   $6.08 
Unvested, September 30, 2023   1,269,219   $ 6.0022.40   $20.26 

 

The following table summarizes information concerning outstanding and exercisable options as of September 30, 2023:

    Options Outstanding   Options Exercisable 
        Average           Average     
        Remaining   Weighted       Remaining   Weighted 
Range of Exercise   Number   Contractual
Life
  

Average
Exercise

   Number   Contractual
Life
  

Average
Exercise

 
Prices   Outstanding   (in years)   Price   Exercisable   (in years)   Price 
$6.00    3,903,617    4.73   $6.00    3,738,336    4.58   $6.00 
 9.00 - 10.50    90,099    2.28    9.52    90,099    2.28    9.52 
 22.40    1,103,938    9.94    22.40             
$6.00 - 22.40    5,097,654    5.82   $9.61    3,828,435    4.53   $6.08 

 

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Stock Option Repricing

 

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 $2,667 was recorded during the nine months ended September 30, 2023, with the remainder of the cost being recorded over the future vesting periods of the options.

 

Stock Option Exercises

 

During the nine months ended September 30, 2023, a total of 207,303 option shares were exercised for total proceeds of $1,321.

 

Stock Warrants

 

The table below summarizes the Company’s warrants activities for the nine months ended September 30, 2023:

       Exercise   Weighted 
   Number of   Price Range   Average 
   Warrant Shares   Per Share   Exercise Price 
Balance, December 31, 2022   725,174   $3.00 - 10.50   $8.24 
Granted   447,906    5.40 - 10.50    7.87 
Cancelled   (36)   9.00    9.00 
Exercised   (479,708)   9.0010.50    8.31 
Expired   (4,762)   10.50    10.50 
Balance, September 30, 2023   688,574   $ 3.00 - 10.50   $7.94 
Vested and exercisable, September 30, 2023   688,574   $ 3.00 - 10.50   $7.94 

 

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The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2023:

    Warrants Outstanding   Warrants Exercisable 
        Average           Average     
        Remaining   Weighted       Remaining   Weighted 
Range of Exercise   Number   Contractual
Life
   Average
Exercise
   Number   Contractual
Life
   Average
Exercise
 
Prices   Outstanding   (in years)   Price   Exercisable   (in years)   Price 
$3.00    133,333    3.42   $3.00    133,333    3.42   $3.00 
 3.0110.49    395,564    2.41    8.58    395,564    2.41    8.58 
 10.50    159,677    1.85    10.50    159,677    1.85    10.50 
$3.0010.50    688,574    2.48   $7.94    688,574    2.48   $7.94 

 

Upon the closing of the IPO and the overallotment exercises, the Company agreed to issue the underwriters warrants entitling them to purchase up to 185,694 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 nine months ended September 30, 2023, the underwriters completed cashless exercises of their warrants to purchase 182,574 shares of common stock at an exercise price of $6.00 per share . Pursuant to this exercise, the warrant holder received 137,952 shares of the Company’s common stock. As of September 30, 2023, a total of 3,120 shares were still outstanding.

 

During the nine months ended September 30, 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. None of these warrants have been exercised as of September 30, 2023.

 

During the nine months ended September 30, 2023, the Company granted warrants to certain of its lenders to purchase up to 217,771 shares of the Company’s common stock. The warrants have exercise prices of $9.00 and $10.50 per share. The Company calculated the aggregate fair value of the warrants on the date of grant to be $3,152 using a Black-Scholes pricing model. As all of the debt converted during the nine months ended September 30, 2023, the value of the warrants was recorded as a financing cost during the same period. During the nine months ended September 30, 2023, 217,591 shares were exercised for proceeds of $2,173.

 

During the nine months ended September 30, 2023, a warrant holder completed a cashless exercise of a warrant to purchase 16,666 shares of common stock at an exercise price of $9.00 per share. Pursuant to this exercise, the warrant holder received 11,666 shares of the Company’s common stock. Warrant holders also exercised 62,877 warrant shares for proceeds of $568.

 

The aggregate intrinsic value for warrant shares outstanding at September 30, 2023 was $10,487.

 

NOTE 10 - LEGAL MATTERS

 

As of September 30, 2023, we were involved in one pending litigation. Although the results of legal proceedings could not be predicted with certainty as of that date, we did not believe that there was a reasonable possibility that the final outcome of this matter would have a material adverse effect on our business or financial results.

 

Subsequently, on October 27, 2023, the Los Angeles County Superior Court granted the Company’s motion for summary judgment on all outstanding claims with prejudice. On November 6, 2023, the court issued an order and final judgment confirming its ruling.

 

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 security, 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

 

In November 2023, in relation to the Company’s Private Placements (see Note 9) the Company agreed to extend the funding deadline for $2,000 of the remaining committed investment amounts from November 15, 2023 to March 31, 2024. The investor who was obligated to fund $22,000 of the remaining committed investment amounts has not made such payments and has indicated that he does not intend to comply with his investment commitments under the Purchase Agreements. We are currently evaluating our potential remedies with respect to this investor’s non-compliance with his contractual obligations to us.

 

Subsequent to September 30, 2023, the Company entered into a long-term non-cancellable lease agreement for a new manufacturing facility that requires aggregate average monthly payments of $13, beginning November 2023. The lease terminates in September 2030, and the Company has the option to extend the lease for an additional five years. The Company will classify the lease as an operating lease and has determined that the value of the right of use asset and lease liability at the inception date will be $826, respectively, using a discount rate of 7.00%.

 

Subsequent to September 30, 2023, an underwriter of the Company’s IPO completed a cashless exercise of their warrant to purchase 3,120 shares of common stock at an exercise price of $6.00 per share. Pursuant to this exercise, the warrant holder received 2,351 shares of the Company’s common stock.

 

Subsequent to September 30, 2023, a warrant holder completed a cashless exercise of their warrant to purchase 146,641 shares of common stock at an exercise price of $10.50 per share. Pursuant to this exercise, the warrant holder received 70,265 shares of the Company’s common stock.

 

Subsequent to September 30, 2023, an option holder exercised their options to purchase 10,400 shares of common stock at an exercise price of $6.00 per share. Pursuant to this exercise, the warrant holder received 10,400 shares of the Company’s common stock.

 

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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 (the “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 (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 (the “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 2 clinical 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.

 

Since inception, we have incurred significant operating losses. Our net loss was $21.5 million for the nine months ended September 30, 2023. As of September 30, 2023, we had an accumulated deficit of $214.8 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.

 

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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.

 

At September 30, 2023, we had cash and cash equivalents on hand in the amount of $29.9 million. During the nine months ended September 30, 2023, we closed our IPO and two Private Placements (see Note 9) and received $37.8 million of net proceeds from these offerings. We also received commitments through the Private Placements for the funding of an additional $24.0 million that were due by November 15, 2023. Due to the funds received through these offerings, and the conversion of preferred stock and convertible notes payable upon the closing of the IPO, we had shareholders’ equity of $24.0 million at September 30, 2023. In November 2023, we agreed to extend the funding deadline for $2.0 million of the remaining committed investment amounts to March 31, 2024. The investor who was obligated to fund $22.0 million of the remaining committed investment amounts has not made such payments and has indicated that he does not intend to comply with his investment commitments through the Private Placements. We are currently evaluating our potential remedies with respect to this investor’s non-compliance with his contractual obligations to us. We expect our existing cash and cash equivalents will last for at least the next 12 months.

 

Recent Developments

 

As previously reported, we began 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. Newsoara is generally obligated under our collaboration agreement to conduct this trial at its cost and expense. In November 2023, we agreed with Newsoara that Genelux would directly engage a contract research organization on mutually agreeable terms to conduct certain startup activities for the NSCLC trial in the U.S. only, with Newsoara reimbursing Genelux for the costs and expenses of such agreed-upon startup activities. Newsoara is permitted to defer such reimbursement payments until the completion of its next round of financing, which Newsoara expects to occur in 2024.

 

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 nine months ended September 30, 2023, we shipped the product to Newsoara and thus recognized the revenue.

 

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Operating Expenses

 

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

 

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