UNITED STATES
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FORM
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VIRPAX PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL PERIOD ENDED MARCH 31, 2022
INDEX
i
Part I
Item 1: Financial Statements
VIRPAX Pharmaceuticals, Inc.
CONDENSED BALANCE SHEETS
| March 31, 2022 | December 31, 2021* | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, par value $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
| * |
See Notes to the Condensed Financial Statements
1
VIRPAX Pharmaceuticals, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended March 31, 2022 | For the Three March 31, | |||||||
| OPERATING EXPENSES | ||||||||
| General and administrative | $ | $ | ||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| OTHER EXPENSE | ||||||||
| Other expense | ( | ) | ||||||
| Interest expense | ( | ) | ||||||
| Loss before tax provision | ( | ) | ( | ) | ||||
| Benefit from income taxes | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss per share | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average common stock outstanding | ||||||||
See Notes to the Condensed Financial Statements
2
VIRPAX Pharmaceuticals, Inc.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| Preferred stock | Common stock | Additional paid-in |
Accumulated | Total stockholders’ |
||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | deficit | equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Common stock issued pursuant to initial public offering, net of offering costs of $ |
— | |||||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Balance at December 31, 2021 | — | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
| Restricted stock awards forfeited | — | ( |
) | |||||||||||||||||||||||||
| Stock-based compensation | — | — | ||||||||||||||||||||||||||
| Net loss | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
See Notes to the Condensed Financial Statements
3
VIRPAX Pharmaceuticals, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three March 31, | For the Three Months Ended March 31, 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Non-cash interest expense | ||||||||
| Stock-based compensation | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayment of notes payable | ( | ) | ||||||
| Proceeds from related party notes payable | ||||||||
| Repayment of related party notes payable | ( | ) | ||||||
| Offering costs related to initial public offering | ( | ) | ||||||
| Proceeds from initial public offering of common stock | — | |||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash and non-cash financing activities | ||||||||
| Cash paid for interest | $ | — | $ | |||||
| Cash paid for taxes | $ | $ | ||||||
See Notes to the Condensed Financial Statements
4
VIRPAX Pharmaceuticals, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Business and Liquidity
Business
Virpax Pharmaceuticals, Inc. (“Virpax” or the “Company”) was incorporated on May 12, 2017 in the state of Delaware. Virpax is a preclinical stage pharmaceutical company focused on developing novel and proprietary drug-delivery systems, and drug-releasing technologies focused on advancing non-opioid and non-addictive pain management treatments and treatments for CNS disorders to enhance patients’ quality of life.
The Company, since inception, has been engaged in organizational activities, including raising capital and research and development activities. The Company has not generated revenues and has not yet achieved profitable operations, nor has it ever generated positive cash flow from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. The Company is subject to those risks associated with any preclinical stage pharmaceutical company that has substantial expenditures for research and development. There can be no assurance that the Company’s research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, the Company operates in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. Further, the Company’s future operations are dependent on the success of the Company’s efforts to raise additional capital.
The Company incurred a net loss of $
On September 16, 2021, the Company completed an
underwritten public offering of
In addition, the global macroeconomic environment could be negatively affected by, among other things, COVID-19 or other pandemics or epidemics, instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom from the European Union, the Russian invasion of the Ukraine and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets.
Management believes that current cash is sufficient to fund operations and capital requirements for at least 12 months from the filing of this quarterly report. Additional financings will be needed by the Company to fund its operations, to complete clinical development of and to commercially develop all of its product candidates. There is no assurance that such financing will be available when needed or on acceptable terms. The Company also has the ability to curtail spending in research and development activities in order to conserve cash.
5
Note 2. Summary of Significant Accounting Policies
Basis of Presentation — The interim condensed financial statements included herein are unaudited. In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position of Virpax at March 31, 2022, and its results of operations and its cash flows for the three months ended March 31, 2022 and 2021. The interim results of operations are not necessarily indicative of the results to be expected for a full year. These interim unaudited financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2021 and 2020 and notes thereto. The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations of the Securities and Exchange Commission (“SEC”) relating to interim financial statements. The December 31, 2021 balance sheet information was derived from the audited financial statements as of that date.
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the financial statements, actual results may materially vary from these estimates.
Significant items subject to such estimates and assumptions include research and development accruals and the valuation of stock-based compensation. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. Accounting estimates used in the preparation of these financial statements change as new events occur, as more experience is acquired, as additional information is obtained and as the operating environment changes.
Basic and Diluted Loss per Share — Basic net loss per share is determined using the weighted average number of shares of common stock outstanding during each period. Diluted net income per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock. The computation of diluted net loss per shares does not include the conversion of securities that would have an antidilutive effect. Equivalent common shares excluded from the calculation of diluted net loss per share since their effect is antidilutive due to the net loss of the Company consisted of the following:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |||||||
| Equivalent common shares | ||||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Unvested restricted stock awards | ||||||||
Cash —At times, the Company’s
cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation. Total cash was $
6
Fair Value of Financial Instruments — The carrying amounts of the Company’s financial instruments, including cash and accounts payable approximate fair value due to the short-term nature of those instruments.
Research and Development — Research and development costs are expensed as incurred. These expenses include the costs of proprietary efforts, as well as costs incurred in connection with certain licensing arrangements and external research and development expenses incurred under arrangements with third parties, such as contract research organizations (“CROs”) and consultants. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that the Company considers in preparing these estimates include the number of patients enrolled in studies, milestones achieved, and other criteria related to the efforts of its vendors. These estimates will be subject to change as additional information becomes available.
Stock-based Compensation — Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The Company’s policy permits the valuation of stock-based awards granted to non-employees to be measured at fair value at the grant date rather than on an accelerated attribution basis over the vesting period.
Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including the fair value of the Company’s common shares prior to its initial public offering, and for options, the expected life of the option and expected share price volatility. The Company uses the Black-Scholes option pricing model to value its option awards. The assumptions used in calculating the fair value of share-based awards represents management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards.
The expected life of options was estimated using the simplified method, as the Company has no historical information to develop reasonable expectations about future exercise patterns and post-vesting employment.
Income Taxes — The Company accounts for income taxes using the asset-and-liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on the deferred tax assets and liabilities of a change in tax rate is recognized in the period that includes the enactment date. A valuation allowance is recorded if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized in future periods.
The Company follows the guidance in ASC Topic
740-10 in assessing uncertain tax positions. The standard applies to all tax positions and clarifies the recognition of tax benefits in
the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether
the tax position is more-likely-than-not to be sustained upon examination based upon its technical merits. The second step involves measurement
of the amount to be recognized. Tax positions that meet the more-likely than-not threshold are measured at the largest amount of tax benefit
that is greater than
7
Note 3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Prepaid insurance | $ | $ | ||||||
| Research and development | ||||||||
| Legal retainer | ||||||||
| Professional and consulting fees | ||||||||
| Other prepaid expenses and current assets | ||||||||
| $ | $ | |||||||
Note 4. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Accrued payroll | $ | $ | ||||||
| Research and development expenses | ||||||||
| Insurance premiums | ||||||||
| Legal expenses | ||||||||
| Professional fees | ||||||||
| Accounting consulting fees | ||||||||
| Tax expenses | ||||||||
| Other | ||||||||
| $ | $ | |||||||
Note 5. Commitments and Contingencies
Litigation
From time to time the Company is subject to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows.
On March 12, 2021, the Company and Mr. Mack (the “Defendants”) were named as defendants in a complaint (the “Complaint”) filed by Sorrento Therapeutics, Inc. (“Sorrento”), and Scilex Pharmaceuticals Inc. (“Scilex” and together with Sorrento, the “Plaintiffs”) in the Court of Chancery of the State of Delaware. In the Complaint, Plaintiffs alleged (i) Mr. Mack breached a Restrictive Covenants Agreement, dated as of November 8, 2016, between himself and Sorrento (the “Restrictive Covenants Agreement”), (ii) the Company tortiously interfered with the Restrictive Covenants Agreement, and (iii) the Company tortiously interfered with Scilex’s relationship with Mr. Mack. On May 7, 2021 Plaintiffs filed an Amended Complaint asserting the same three causes of action. On September 28, 2021, Plaintiffs filed a Second Amended Complaint asserting the same three causes of action as the prior complaints, as well as claims in which Plaintiffs allege (i) Mr. Mack breached an Employment, Proprietary Information and Inventions Agreement, dated as of October 25, 2016, between himself and Sorrento (the “Employment Agreement”), (ii) the Company tortiously interfered with the Employment Agreement, (iii) Mr. Mack breached his fiduciary duties to Scilex, and (iv) the Company aided and abetted Mr. Mack’s alleged breach of fiduciary duties to Scilex. On April 1, 2022, Plaintiffs filed a Third Amended Complaint. The Third Amended Complaint asserts the same causes of action as the Second Amended Complaint, as well as claims for (i) misappropriation of trade secrets by Defendants under Delaware law, and (ii) misappropriation of trade secrets by Defendants under California law. On April 18, 2022, Defendants filed answers to the Third Amended Complaint. Pursuant to a scheduling order entered February 22, 2022, trial is set for September 12 to 14, 2022. The Company intends to vigorously defend the action. However, the Company is unable to predict the ultimate outcome of the lawsuit at this time.
8
Global Pandemic Outbreak
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic. The outbreak has become increasingly widespread in the United States, impacting the markets in which the Company operates. While the full impact of the pandemic continues to evolve, the financial markets have been subject to significant volatility that adversely impacts the Company’s ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing initiatives. The uncertain financial markets, disruptions in supply chains, mobility restraints, and changing priorities as well as volatile asset values also affect the Company’s ability to enter into collaborations, joint ventures, and license and royalty agreements. The outbreak and government measures taken in response to the pandemic have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, have spiked, while demand for other goods and services, such as travel, have fallen. The future progression of the outbreak and its effects on our business and operations are uncertain. We may face difficulties recruiting or retaining patients in our ongoing and planned clinical trials if patients are affected by the virus or are fearful of traveling to our clinical trial sites because of the outbreak. We and our third-party contract manufacturers, contract research organizations, and clinical sites may also face disruptions in procuring items that are essential to our research and development activities, including, for example, medical and laboratory supplies used in our clinical trials or preclinical studies, in each case, that are sourced from abroad or for which there are shortages because of ongoing efforts to address the outbreak.
While expected to be temporary, these disruptions may negatively impact the Company’s results of operations, financial condition, and liquidity in 2022 and potentially beyond.
Note 6. Stockholders’ Equity
Overview
Preferred Stock
The Company’s current Certificate of Incorporation authorizes
the issuance of preferred stock. The total number of shares which the Company is authorized to issue is
Common Stock
The Company’s current Certificate of Incorporation authorizes
the issuance of common stock. The total number of shares which the Company is authorized to issue is
On February 19, 2021, the Company issued
Warrants
In conjunction with the IPO, the Company granted
the underwriters warrants to purchase
There were warrants to purchase
9
Note 7. Stock-Based Compensation
Restricted Stock Awards
On May 20, 2017, the Company established the Virpax Pharmaceuticals, Inc. Amended and Restated 2017 Equity Incentive Plan (the “Plan”). The Company’s Board of Directors, acting through its Equity Incentive Plan Committee, has determined that it would be to the advantage and best interest of the Company and its stockholders to grant restricted stock awards to certain individuals as compensation to serve as an employee of the Company and as an incentive for increased efforts during such service.
As of March 31, 2022 and December 31, 2021,
Stock Options
The Plan provides a means for eligible employees,
officers, non-employee directors and other individual service providers (collectively, “eligible persons”) to develop a sense
of proprietorship and personal involvement in the development and financial success of the Company and to encourage them to devote their
best efforts to the business of the Company, thereby advancing the interests of the Company and its stockholders. The Company, by means
of the Plan, seeks to retain the services of such eligible persons and to provide incentives for such eligible persons to exert maximum
efforts for the success of the Company. The Plan commenced on May 20, 2017 (the “Effective Date”) and is administered by the
Compensation Committee of the Board (the “Compensation Committee”); provided that the entire Board may act in lieu of the
Compensation Committee on any matter. The maximum aggregate number of shares of common stock which may be issued under all awards granted
to participants under the Plan initially shall be
On April 25, 2020, the Company amended and restated
the Plan to grant stock options to non-employee directors. Stock options to purchase
Stock-based compensation expense for the three
months ended March 31, 2022 and 2021 was $
10
The fair value of option awards is estimated using the Black-Scholes option-pricing model. Exercise price of each award is generally not less than the per share fair value in effect as of that award date. The determination of fair value using the Black-Scholes model is affected by the Company’s share fair value as well as assumptions regarding a number of complex and subjective variables, including expected price volatility, risk-free interest rate and projected employee share option exercise behaviors. Options granted or modified under the Plan during the three months ended March 31, 2022 and 2021 were valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| For the Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected term (years) | ||||||||
| Risk-free interest rate | % | |||||||
| Expected volatility | % | |||||||
| Expected dividend yield | % | |||||||
The Company estimates its expected volatility by using a combination of historical share price volatilities of similar companies within our industry. The risk-free interest rate assumption is based on observed interest rates for the appropriate term of the Company’s options on a grant date. The expected option term assumption is estimated using the simplified method and is based on the mid-point between vest date and the remaining contractual term of the option, since the Company does not have sufficient exercise history to estimate expected term of its historical option awards.
The following is a summary of stock option activity under the stock option plan for the three months ended March 31, 2022 and for the year ended December 31, 2021:
| Number of Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Options outstanding at January 1, 2021 | $ | $ | ||||||||||||||
| Forfeited | ( | ) | ||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Granted | ||||||||||||||||
| Options outstanding at December 31, 2021 | ||||||||||||||||
| Forfeited | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Granted | ||||||||||||||||
| Options outstanding at March 31, 2022 | $ | $ | ||||||||||||||
| Options exercisable at March 31, 2022 | $ | $ | ||||||||||||||
On January 31, 2022, our Board of Directors approved
an equity compensation award for the Company’s officers and employees. The Board approved this award of options to purchase an aggregate
of
On January 1, 2022, options were granted to the
Non-Employee Directors pursuant to the 2017 Plan to purchase an aggregate of
The weighted-average grant-date fair value of
stock options granted during the three months ended March 31, 2022 was $
As of March 31, 2022, there was $
11
Note 8. Related-Party Transactions
In October 2018 and January 2019, the Company
issued notes with an aggregate principal amount of $
The Company’s Chief Executive Officer elected
to temporarily defer his salary. In March 2021, the Company’s Chief Executive Officer ceased deferring compensation with an accrued
balance of $
Note 9. Research and Development and License Agreements
MedPharm Limited
Research and Option Agreement
On April 11, 2017, the Company entered into a research and option agreement, as amended on May 30, 2018 (the “MedPharm Research and Option Agreement”), with MedPharm Limited, a company organized and existing under the laws of the United Kingdom (“MedPharm”), pursuant to which MedPharm granted the Company an option to obtain an exclusive, world-wide, royalty bearing license to use certain technology developed by MedPharm. Pursuant to the MedPharm Research and Option Agreement, MedPharm will conduct certain research and development of proprietary formulations incorporating certain MedPharm technologies and certain of the Company’s proprietary molecules.
Under the MedPharm Research and Option Agreement, MedPharm granted the Company an option (the “MedPharm Option”) to obtain an exclusive (even to MedPharm), worldwide, sub-licensable (through multiple tiers), royalty bearing, irrevocable license to research, develop, market, commercialize, and sell any product utilizing MedPharm’s spray formulation technology which is the result of the activities performed under the MedPharm Research and Option Agreement, subject to the Company’s entry into a definitive license agreement with MedPharm. In order to exercise the MedPharm Option, the Company must provide MedPharm with written notice of such exercise before the end of the Option Period (as defined in the MedPharm Research and Option Agreement). The Option Period is subject to extension upon mutual agreement with MedPharm.
Pursuant to the MedPharm Research and Option Agreement, the Company has a right of first refusal with respect to any license or commercial arrangement involving any Licensed Intellectual Property (as defined in the MedPharm Research and Option Agreement) in combination with any Virpax Molecule (as defined in the MedPharm Research and Option Agreement). In the event that MedPharm reaches an agreement with respect to a license or other commercial arrangement that involves technology or molecules covered by the right of first refusal, the Company has ten business days from the date of notice to notify MedPharm of its intention to exercise the right of first refusal and the Company’s intention to match the financial terms of the other license or commercial arrangement.
License Agreement
On June 6, 2017, as a result of the Company’s
exercise of the MedPharm Option under the MedPharm Research and Option Agreement, the Company entered into a license agreement, as amended
on September 2, 2017 and October 31, 2017 (the “MedPharm License Agreement”), with MedPharm for the exclusive global rights
to discover, develop, make, sell, market, and otherwise commercialize any pharmaceutical composition or preparation (in any and all dosage
forms) in final form containing one or more compounds, including Diclofenac Epolamine (“Epoladerm”), that was developed, manufactured
or commercialized utilizing MedPharm’s spray formulation technology (“MedPharm Product”), to be used for any and all
uses in humans (including all diagnostic, therapeutic and preventative uses). Under the MedPharm License Agreement, the Company is required
to make future milestone and royalty payments to MedPharm. We are obligated to make aggregate milestone payments to MedPharm of up to
GBP
12
LipoCureRx, Ltd.
On March 19, 2018, the Company entered into a
license and sublicense agreement (the “LipoCure Agreement”) with LipoCureRx, Ltd., a company organized and existing under
the laws of Israel (“LipoCure”), for the sole and exclusive global license and sub-license rights to discover, develop, make,
sell, market, and otherwise commercialize bupivacaine liposome, in injectable gel or suspension (“Licensed Compound”) or any
pharmaceutical composition or preparation (in any and all dosage forms) in final form, including any combination product, containing a
Licensed Compound (“Licensed Product”), including Probudur. Under
Nanomerics Ltd.
Nanomerics Collaboration Agreement
On April 11, 2019,
Under the Nanomerics Collaboration Agreement,
the Company is required to make royalty payments equal to a single digit percentage of annual net sales of royalty qualifying products.
The Company is also required to make aggregate milestone payments of up to $
13
Nanomerics License Agreement (AnQlar)
On March 9, 2022, the Company entered into an
Amended and Restated Collaboration and License Agreement with Nanomerics (the “Amended Nanomerics License Agreement”) which
amended and restated the August 7, 2020, Nanomerics License Agreement and expanded the Company’s North American rights for AnQlar
to include exclusive global rights to develop and commercialize AnQlar as an anti-viral barrier to prevent or reduce the risk or the intensity
of viral infections. The Amended Nanomerics License Agreement provides for payments up to $
Nanomerics License Agreement (VRP324)
On September 17, 2021, the Company entered into
a collaboration and license agreement with Nanomerics (the “Nanomerics License Agreement - VRP324”) for the exclusive worldwide
license to develop and commercialize an investigational formulation delivered via the nasal route to enhance pharmaceutical-grade cannabidiol
(“CBD”) transport to the brain to potentially treat seizures associated with tuberous sclerosis complex (TSC), Lennox-Gastaut
syndrome and Dravet syndrome in patients one year of age and older. Lennox-Gastaut syndrome and Dravet syndrome are rare central nervous
system diseases considered serious epileptic encephalopathies that cause different types of epileptic seizures as well as cognitive and
behavioral changes and are generally resistant to treatment. Under the Nanomerics License Agreement – VRP324, the Company is required
to make royalty payments within a range of
On April 21, 2022, the Company notified Nanomerics
that the study aim of demonstrating the ability of Nanomerics platform technology delivering CBD to the brain via nasal administration
in an animal model was met. Pursuant to the Nanomerics License Agreement - VRP324, the Company paid a milestone payment of $
14
Research Agreements
Yissum
On May 12, 2019, the Company entered into an Agreement
for Rendering of Research Services (the “May 2019 Yissum Research Agreement”), with Yissum Research Development Company of
the Hebrew University of Jerusalem, Ltd. (“Yissum”). Under the May 2019 Yissum Research Agreement, the Company shall provide
funding for research and development studies to be performed by researchers at Hebrew University related to the formulation, preparation
and characterization of Liposomal Bupivacaine for size zeta potential, drug loading and rate of drug release. In consideration for the
research services, the Company agreed to pay research service fees of $
On October 11, 2020,
On June 30, 2021, the Company entered into an
Agreement for Rendering of Research Services with Yissum (the “June 2021 Yissum Research Agreement”) on substantially similar
terms and conditions as detailed above under the October 2020 Yissum Research Agreement. Under the June 2021 Yissum Research Agreement,
the Company shall provide funding for research and development studies to be performed by researchers at Hebrew University related to
the optimization of the Liposomal Bupivacaine formulation and to increase stability for manufacturing purposes. The Company may terminate
the agreement at any time and shall be only responsible to pay Yissum for work performed through the date of termination. In consideration
for the research services, the Company agreed to pay research service fees of $
Lipocure
On June 29, 2021, the Company entered into an
Agreement for Rendering of Research Services (the “June 2021 Lipocure Research Agreement”) with Lipocure RX, Ltd. (“Lipocure”).
Under the June 2021 Lipocure Research Agreement, the Company shall provide funding for research and development related to the optimization
of the Liposomal Bupivacaine formulation and eventual manufacture of preclinical batches including batches for stability testing, animal
studies and toxicology work. This will also include work associated with the potential filing of additional provisional patent applications.
The Company may terminate the agreement at any time upon 30 days written notice and shall be only responsible to pay Lipocure for work
performed through the date of such notice. In consideration for the research services, the Company agreed to pay research service fees
of $
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NCATS-NIH Cooperative Research and Development Agreement
On August 25, 2020, the Company entered into a
Cooperative Research and Development Agreement (“CRADA”) with the National Center for Advancing Translational Science (“NCATS”).
This collaboration is for the continued development of the Company’s product candidate, NES100, an intranasal peptide, for the management
of acute and chronic non-cancer pain.
With respect to NCATS rights to any invention made solely by an NCATS employee(s) or made jointly by an NCATS employee(s) and our employee(s), the CRADA grants to the Company an exclusive option to elect an exclusive or nonexclusive commercialization license. For inventions owned solely by NCATS or jointly by NCATS and the Company, and licensed pursuant to the Company’s option, the Company must grant to NCATS a nonexclusive, nontransferable, irrevocable, paid-up license to practice the invention or have the invention practiced throughout the world by or on behalf of the United States government. For inventions made solely by an employee of the Company, we grant to the United States government a nonexclusive, nontransferable, irrevocable, paid-up license to practice the invention or have the invention practiced throughout the world by or on behalf of the United States government for research or other government purposes.
Note 10. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through May 16, 2022. The following are material subsequent events:
On April 25, 2022, options were granted to a consultant
pursuant to the 2017 Plan to purchase an aggregate of
U.S Army Institute of Surgical Research
On April 28, 2022, the Company entered into a CRADA with the U.S. Army Institute of Surgical Research (USAISR) to evaluate Probudur. The research project will evaluate the analgesic effectiveness and physiologic effects of Probudur. This agreement will automatically expire on September 30, 2023 unless it is revised by mutual written agreement. No funding is being provided by either party to the other party under the agreement. Each party is responsible for funding its own work performed and other activities undertaken for the research project under this agreement. The parties may elect to terminate this agreement, or portions thereof, at any time by mutual consent. Either party may unilaterally terminate this entire agreement at any time by giving the other party written notice, not less than thirty (30) days prior to the desired termination date.
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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly those under “Risk Factors.”
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.
There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:
| ● | our lack of operating history; |
| ● | the expectation that we will incur significant operating losses for the foreseeable future and will need significant additional capital; |
| ● | our current and future capital requirements to support our development and commercialization efforts for our product candidates and our ability to satisfy our capital needs; |
| ● | our dependence on our product candidates, which are still in preclinical or early stages of clinical development; |
| ● | our, or that of our third-party manufacturers, ability to manufacture current good manufacturing practice (“cGMP”) quantities of our product candidates as required for preclinical and clinical trials and, subsequently, our ability to manufacture commercial quantities of our product candidates; |
| ● | our ability to complete required clinical trials for our product candidates and obtain approval from the US Food and Drug Administration (“FDA”) or other regulatory agencies in different jurisdictions; |
| ● | our lack of a sales and marketing organization and our ability to commercialize our product candidates if we obtain regulatory approval; |
| ● | our dependence on third-parties to manufacture our product candidates; |
| ● | our reliance on third-party contract research organizations (“CROs”) to conduct our clinical trials; |
| ● | our ability to maintain or protect the validity of our intellectual property; |
| ● | our ability to internally develop new inventions and intellectual property; |
| ● | interpretations of current laws and the passages of future laws; |
| ● | acceptance of our business model by investors; |
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| ● | the accuracy of our estimates regarding expenses and capital requirements; |
| ● | our ability to adequately support organizational and business growth; |
| ● | the continued spread of COVID-19 and the resulting global pandemic and its impact on our preclinical studies and clinical studies, including impacts on our supply chain; and. |
| ● | the outcome of certain current litigation in which we and our Chief Executive Officer are named as defendants (see “Item 3—Legal Proceedings” for more information on our current litigation). |
The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.
Overview
Company Overview
We are a preclinical-stage pharmaceutical company focused on developing novel and proprietary drug delivery systems across various pain indications in order to enhance compliance and optimize each product candidate in our pipeline. Our drug-delivery systems, and drug-releasing technologies being developed are focused on advancing non-opioid and non-addictive pain management treatments and treatments for central nervous system (“CNS”) disorders to enhance patients’ quality of life.
We have exclusive global rights to the following proprietary patented technologies: (i) Molecular Envelope Technology (“MET”) that uses an intranasal device to deliver enkephalin for the management of acute and chronic pain, including pain associated with cancer (Envelta™) and PTSD, (ii) Injectable “local anesthetic” Liposomal Gel Technology for postoperative pain management (Probudur™), and (iii) Topical Spray Film Delivery Technology for osteoarthritis pain (Epoladerm™). We believe Envelta could support the current effort among prescribers, regulators, and patients to seek non-opioid and non-addictive treatment options to combat the opioid epidemic. We intend to utilize these delivery technologies to selectively develop a portfolio of patented 505(b)(2) and new chemical entity (“NCE”) candidates for commercialization. We also have exclusive worldwide rights to develop and commercialize an investigational formulation delivered via the nasal route to enhance pharmaceutical-grade cannabidiol (“CBD”) transport to the brain to potentially treat seizures associated with tuberous sclerosis complex (“TSC”), Lennox-Gastaut syndrome and Dravet syndrome in patients one year of age and older. While we are currently focused on advancing non-opioid and non-addictive pain management treatments and treatments for CNS disorders, we also plan on using our proprietary delivery technologies to develop our anti-viral therapy (AnQlar™) as an anti-viral barrier to potentially prevent or reduce the risk or the intensity of viral infections in humans, including, but not limited to, influenza and SARS-CoV-2 (“COVID 19”). We currently have exclusive global rights for AnQlar pursuant to a collaboration and license agreement.
Envelta
We believe Envelta and PES200 could support the current effort among prescribers, regulators, and patients to seek non-addictive treatment options for pain. We plan to utilize these delivery technologies to selectively develop a portfolio of patented 505(b)(2) and NCE candidates for commercialization. The IND enabling studies for Envelta are being performed under a Cooperative Research and Development Agreement (“CRADA”) entered into by us and the National Center for Advancing Translational Sciences (“NCATS”). We intend to use these studies as a source for INDs for two additional potential indications, cancer pain and post-traumatic stress disorder. To date, two of the four planned initial in vitro studies have been successfully completed. These preclinical studies under the CRADA are expected to be conducted in 2022.
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In February 2022, we completed a 14-day intranasal dose range finding toxicity study of Envelta in rats with a 14-day recovery period which showed no adverse related findings in hematology, coagulation and serum chemistry data, with no treatment related toxicology findings or mortality noted. A 14-day intranasal dose range finding toxicity study of Envelta in dogs with a 14-day recovery period was also conducted and showed no adverse toxicologic findings.
Probudur
Probudur is our injectable bupivacaine liposomal hydrogel for postoperative pain management, which we believe to have improved onset and extended duration of action compared to existing treatment options. Charles River Laboratories was engaged to perform seven preclinical animal studies during the second half of 2021, including method, dosage, and toxicity as part of the required FDA enabling trials for an IND for Probudur. However, we elected to strategically delay these trials in order to enhance the formulation of Probudur to increase stability for manufacturing purposes and to possibly extend the lifetime of a relevant patent.
On June 30, 2021, we entered into an Agreement for Rendering of Research Services with Yissum (the “June 2021 Yissum Research Agreement”) on substantially similar terms and conditions as detailed above (see Note 9 - “Research and Development and License Agreements” to our condensed financial statements filed herewith) under the October 2020 Yissum Research Agreement. Under the June 2021 Yissum Research Agreement, we shall provide funding for research and development studies to be performed by researchers at Hebrew University related to the optimization of the Liposomal Bupivacaine formulation and to increase stability for manufacturing purposes. We may terminate the agreement at any time and shall be only responsible to pay Yissum for work performed through the date of termination. In consideration for the research services, we agreed to pay research service fees of $337,500 in six equal quarterly installments. All services to be provided under the June 2021 Yissum Research Agreement initiated on July 1, 2021 and are anticipated to be completed towards the end 2022.
On June 29, 2021, we entered into an Agreement for Rendering of Research Services with Lipocure RX, Ltd. (the “June 2021 Lipocure Research Agreement”). Under the June 2021 Lipocure Research Agreement, we shall provide funding for research and development related to the optimization of the Liposomal Bupivacaine formulation and eventual manufacture of preclinical batches including batches for stability testing, animal studies and toxicology work. This will also include work associated with the potential filing of additional provisional patent applications. We may terminate the agreement at any time upon 30 days written notice and shall be only responsible to pay Lipocure for work performed through the date of such notice. In consideration for the research services, the Company agreed to pay research service fees of $200,000 upon execution, as well as $400,000 in July 2021, $270,000 in both September 2021 and January 2022, and three additional payments of $270,000 during 2022. We also agreed to pay $250,000 to Lipocure upon successful completion of Chemistry, Manufacturing and Controls (“CMC”) filing with the FDA. All services to be provided under the June 2021 Lipocure Research Agreement initiated on July 1, 2021 and are anticipated to be completed towards the end 2022. We recorded $270,000 and $0 in research and development expense for the three months ended March 31, 2022 and 2021, respectively, associated with this agreement.
On April 28, 2022, we entered into a CRADA with the U.S. Army Institute of Surgical Research (USAISR) to evaluate Probudur. The research project will evaluate the analgesic effectiveness and physiologic effects of Probudur. This agreement will automatically expire on September 30, 2023 unless it is revised by mutual written agreement. No funding is being provided by either party to the other party under the agreement. Each party is responsible for funding its own work performed and other activities undertaken for the research project under this agreement. The parties may elect to terminate this agreement, or portions thereof, at any time by mutual consent. Either party may unilaterally terminate this entire agreement at any time by giving the other party written notice, not less than thirty (30) days prior to the desired termination date.
Epoladerm
We believe the Topical Spray Film Delivery Technology, which we refer to as Epoladerm, could provide a pathway for additional proprietary spray formulations with strong adhesion and accessibility properties upon application, especially around joints and curved body surfaces. Our belief is based on, in part, an American College of Physicians and American Academy of Family Practice national guideline for the treatment of non-Low Back Musculoskeletal Pain which recommends topical nonsteroidal anti-inflammatory drugs (“NSAIDs”) as the first-line therapy in patients with acute pain from non-low back, musculoskeletal injuries. According to the new guideline, evidence shows that topical NSAIDs were among the most effective for pain reduction, physical function, treatment satisfaction, and symptom relief and were not associated with any significant side effects. The guideline was based on a systematic evidence review of the comparative efficacy and safety of non-pharmacological and pharmacological management of acute pain from non-low back, musculoskeletal injuries in adults in the outpatient setting and a systematic review of the predictors of prolonged opioid use.
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Pursuant to a Research and Option Agreement we have entered into with MedPharm Limited (the “MedPharm Research and Option Agreement”), MedPharm will conduct certain research and development activities of proprietary formulations incorporating certain MedPharm technologies and certain of our proprietary molecules. These proprietary molecules relate to indications which include, but are not limited to, treatment of estrogen levels, Alzheimer’s disease, dementia, Parkinson’s disease, neuropathic issues, and acute and chronic pain. Under the agreement, we were granted an option to obtain an exclusive, world-wide, sub-licensable, royalty bearing, irrevocable license to research, develop, market, use, commercialize, and sell any product utilizing MedPharm’s spray formulation technology.
Based on results from our recent non-clinical studies and further research of Epoladerm, we have determined that it is reasonable to focus our Epoladerm indication on chronic osteoarthritis of the knee, representing what we believe to be a better global market opportunity for us.
In December 2021, we completed a single dose pharmacokinetic study of dermal administration of Epoladerm in minipigs as part of the required IND enabling trials. Single-dose transdermal delivery of Epoladerm was well-tolerated in all minipigs and no treatment-related clinical observations, changes in body weight, or dermal irritation were observed. All Epoladerm treated animals had plasma levels of Epoladerm confirming transdermal absorption. The maximum plasma concentration (Cmax) was reached at 4 hours post-dose, and plasma Epoladerm remained at 24-hour post-dose for all animals.
On December 17, 2021, we executed a clinical trial agreement with Altasciences Company, Inc., a leading clinical trial services company, for a First-in-Human study investigating Epoladerm™ for pain associated with chronic osteoarthritis of the knee. The study is planned to take place in Canada with a Clinical Trial Application (“CTA”) filing. Original enrollment of the first patient was anticipated to start in the second quarter of 2022; however, due to a delay in procuring the active pharmaceutical ingredient necessary for the drug product candidate, enrollment is now anticipated to start in fourth quarter of 2022.
In January 2022, we reported positive results of four preclinical dermal safety studies for Epoladerm™. Researchers concluded that once daily dermal administration of Epoladerm for 28 days was well-tolerated with no serious adverse findings. The studies were performed by Charles River Laboratories, a well-known clinical research organization. The studies included a skin irritation study in rabbits; a dermal sensitization assessment in guinea pigs; and a phototoxicity assay in mouse fibroblasts. Epoladerm was well tolerated in each of the studies and no reportable dermal irritation, dermal sensitization or phototoxicity was observed.
The successful completion of the above studies has allowed us to initiate the drafting of the IND submission documents that would accompany the IND application to the FDA, including a trial design for a Phase I study for chronic osteoarthritis of the knee. In addition, we have scheduled a series of preclinical studies for this chronic use indication to run in parallel with our anticipated Phase I study for Epoladerm. The filing of the IND application would follow the anticipated First-in-Human study in Canada noted above and we plan to submit the results of this study to facilitate a more robust submission.
AnQlar
While we are currently focused on the development of our non-opioid and non-addictive pain management pipeline of product candidates, we also plan on using our proprietary delivery technologies to develop anti-viral therapies (“AnQlar”) as an anti-viral barrier to potentially prevent or reduce the risk or the intensity of viral infections in humans, including, but not limited to, influenza and SARS-CoV-2 (COVID 19). AnQlar is our patented high-density intranasal molecular masking spray being developed as an anti-viral barrier that will be used as an adjuvant to barrier-based personal protective equipment. Our results from an animal study of AnQlar demonstrated inhibited viral replication and decreased levels of virus in animal brain tissue.
We submitted and received a written pre-investigational new drug (“pre-IND”) response from the FDA for AnQlar. In its pre-IND response, the FDA provided guidance on our pathway to pursue prophylactic treatment against SARS-CoV-2 and influenza for daily use as an over the counter (“OTC”) product. We believe the results of the pre-IND response support further research on AnQlar as an intranasal protective that may limit transmission of the viruses to others. If we are able to successfully complete the required clinical trials for this product candidate, we intend to move forward and pursue an NDA for AnQlar as a once daily intranasal treatment. The FDA has indicated that, upon successful completion, we may pursue an NDA drug approval with the Office of Non-Prescription Drugs.
In August 2021, we engaged Syneos Health to assist with the optimal clinical trial design to facilitate an efficient regulatory and development timeline.
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On August 25, 2021, we entered into a commercial manufacturing and supply agreement with Seqens, an integrated global leader in pharmaceutical solutions with 24 manufacturing sites worldwide and seven research and development facilities throughout the U.S. and Europe. The agreement with Seqens provides for both the supply material for our clinical studies as well as the long-term commercial supply of AnQlar. Seqens will conduct process development and validation of additional large scale commercial quantities of AnQlar at its facilities in Devens and Newburyport, Massachusetts.
On September 29, 2021, we engaged a research and development firm to conduct a series of IND enabling toxicity studies for AnQlar which are expected to be completed by mid-2022. Upon successful completion of these studies, we intend to submit an IND application to the FDA, including a trial design for a Phase I study as an anti-viral therapy.
On October 19, 2021, we engaged Nanomerics to supply AnQlar for our planned IND enabling toxicology studies. Nanomerics initiated the production of this supply during the quarter ended March 31, 2022.
VRP324
VRP324 is being developed by Nanomerics as an investigational formulation delivered via the nasal route to enhance CBD transport to the brain. VRP324 uses a preassembled device and cartridge to propel the CBD powder formulation into the nose to the brain via the olfactory nerve/bulb. This product candidate will be formulated to potentially treat seizures associated with tuberous sclerosis complex (TSC), Lennox-Gastaut syndrome and Dravet syndrome in patients one year of age and older. Lennox-Gastaut syndrome and Dravet syndrome are rare central nervous system diseases considered serious epileptic encephalopathies that cause different types of epileptic seizures as well as cognitive and behavioral changes and are generally resistant to treatment.
On April 21, 2022, we notified Nanomerics that the study aim of demonstrating the ability of Nanomerics platform technology delivering CBD to the brain via nasal administration in an animal model was met. Pursuant to the Nanomerics License Agreement - VRP324, we paid a milestone payment of $500,000 upon meeting this study aim in April 2022.
Critical Accounting Policies and Use of Estimates
We have based our management’s discussion and analysis of financial condition and results of operations on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical development expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully discussed in Note 2 to our audited financial statements contained within our Form 10-K for the year ended December 31, 2021, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.
Research and Development Expenses
We rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to these costs.
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Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. Our policy permits the valuation of stock-based awards granted to non-employees to be measured at fair value at the grant date rather than on an accelerated attribution basis over the vesting period.
Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including the fair value of our common shares prior to becoming a public company, and for options, the excepted life of the option and expected share price volatility. We use the Black-Scholes option pricing model to value its option awards. The assumptions used in calculating the fair value of share-based awards represents management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. See Note 7 to notes to condensed financial statements.
Results of Operations
Three Months Ended March 31, 2022 and 2021
Operating expenses:
| Three Months Ended March 31, |
Change | |||||||||||||||
| 2022 | 2021 | Dollars | Percentage | |||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | $ | 1,782,413 | $ | 1,273,572 | $ | 508,841 | 40 | % | ||||||||
| Research and development | 3,341,406 | 1,075,000 | 2,266,406 | 211 | % | |||||||||||
| Total operating expenses | $ | 5,123,819 | $ | 2,348,572 | $ | 2,775,247 | 118 | % | ||||||||
General and administrative expenses increased by $508,841, or 40%, to $1,782,413 for the three months ended March 31, 2022 from $1,273,572 for the three months ended March 31, 2021. The primary reason for the increase in general and administrative costs was the result of (i) an increase in legal defense costs with regard to litigation and general corporate legal costs of $295,252, (ii) an increase in salaries and wages and employee benefits related to new hires of $179,426, (iii) an increase in insurance costs related to directors’ and officers’ insurance of $146,849, and (iv) an increase in non-executive board compensation of $60,000. This was offset by a decrease in stock based compensation of $194,637.
Research and development expenses increased by $2,266,406, or 211%, to $3,341,406 for the three months ended March 31, 2022 from $1,075,000 for the three months ended March 31, 2021. The increase was primarily attributable to (i) Milestone payments of $1,500,000 and $1,000,000 made to Nanomerics related to AnQlar were triggered during the three months ended March 31, 2022 and 2021, respectively, (ii) an increase in preclinical activity of $1,012,067 related to AnQlar, (ii) increases in preclinical activity related to Epoladerm of $374,734, (iii) an increase in preclinical work related to Probudur of $297,322, and (iv) a slight increase in regulatory activities related to Envelta and preclinical activities related to VRP324 of $40,589 and $30,000, respectively.
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Other expenses:
| Three Months Ended March 31, | Change | |||||||||||||||
| 2022 | 2021 | Dollars | Percentage | |||||||||||||
| Other expense: | ||||||||||||||||
| Other expense | $ | (13,183 | ) | $ | - | $ | (13,183 | ) | 100 | % | ||||||
| Interest expense | $ | — | $ | (30,699 | ) | $ | 30,699 | (100 | )% | |||||||
| Total other expenses: | $ | (13,183 | ) | $ | (30,699 | ) | $ | 17,516 | (57 | )% | ||||||
Interest expense decreased by $30,699 to $0 for the three months ended March 31, 2022 from $30,699 for the three months ended March 31, 2021. The decrease was primarily the result of the repayment of a convertible promissory note and related party notes payable in 2021. Other expense increased by $13,183 for the three months ended March 31, 2022 primarily due to foreign exchange losses on the payment of accounts payable.
Liquidity and Capital Resources
Three Months Ended March 31, 2022 and Year Ended December 31, 2021
Capital Resources
| March 31, | December 31, | Change | ||||||||||||||
| 2022 | 2021 | Dollars | Percentage | |||||||||||||
| Current assets | $ | 34,745,974 | $ | 39,572,436 | $ | (4,826,462 | ) | (12 | )% | |||||||
| Current liabilities | 2,186,891 | 2,087,691 | 99,200 | 5 | % | |||||||||||
| Working capital | 32,559,083 | 37,484,745 | (4,925,662 | ) | (13 | )% | ||||||||||
As of March 31, 2022, our principal source of liquidity was our cash, which totaled approximately $30.8 million. To continue to grow our business over the longer term, we plan to commit substantial resources to research and development, preclinical and clinical trials of our product candidates, other operations and potential product acquisitions and in-licensing. We have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our plan to acquire or in-license and develop additional products and product candidates to augment our internal development pipeline. Strategic transaction opportunities that we may pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue development, acquisition or in-licensing of approved or development products in new or existing therapeutic areas or continue the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to license or acquire additional products, product candidates or companies to expand our operations, or for general corporate purposes. Strategic transactions may require us to raise additional capital through one or more public or private debt or equity financings or could be structured as a collaboration or partnering arrangement. Any equity financing would be dilutive to our stockholders. We have no arrangements, agreements, or understandings in place at the present time to enter into any acquisition, in-licensing or similar strategic business transaction.
Equity Financings
On February 16, 2021, we closed an initial public offering of 1,800,000 shares of our common stock at a public offering price of $10.00 per share, for net proceeds of $15.8 million, after deducting underwriting discounts and offering expenses. All of the net proceeds from the offering are substantially being used to fund research and development of our Epoladerm, Probudur, Envelta and AnQlar indications and other development programs, and for working capital and other general corporate purposes.
Debt
Promissory Notes
In October 2018 and January 2019, we issued notes with an aggregate principal amount of $1,000,000. These notes were issued to Anthony Mack, Chief Executive Officer and significant investor of the Company and were repaid with the net proceeds from our Underwritten Public Offering in September 2021. In addition, in January 2021, we issued notes with an aggregate principal amount of $75,000 and $25,000, respectively. These notes were issued to Anthony Mack, Chief Executive Officer and significant investor of the Company for $75,000 and Christopher Chipman, Chief Financial Officer, for $25,000, and were paid off with the proceeds from our initial public offering in February 2021.
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Cash Flows
Three Months Ended March 31, 2022 and 2021
The following table summarizes our cash flows from operating and financing activities:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Statement of cash flow data: | ||||||||
| Total net cash provided by (used in): | ||||||||
| Operating activities | $ | (6,044,857 | ) | $ | (3,080,238 | ) | ||
| Financing activities | - | 15,289,727 | ||||||
| Increase (decrease) in cash | $ | (6,044,857 | ) | $ | 12,209,489 | |||
Operating Activities
For the three months ended March 31, 2022, cash used in operations was $6,044,857 compared to $3,080,238 for the three months ended March 31, 2021. The increase in cash used in operations was primarily the result of the increase in net loss and an increase in prepaid insurance and prepaid research and development costs.
Financing Activities
Cash provided by financing activities was $15,289,727 during the three months ended March 31, 2021, attributable primarily due to net proceeds received from our initial public offering in February 2021 of $15,783,207, after deducting underwriting discounts and offering expenses. This was slightly offset by repayment in full of our RRD note of $493,480 in February 2021. No financing activities took place during the three months ended March 31, 2022.
Future Capital Requirements
It is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, changing circumstances may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently expected because of circumstances beyond our control.
Our expectations regarding future cash requirements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments that we make in the future. We have no current understandings, agreements or commitments for any material acquisitions or licenses of any products, businesses or technologies. We may need to raise substantial additional capital in order to engage in any of these types of transactions.
We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of our product candidates. If we obtain marketing approval for our product candidates, we will incur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect to continue to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to us as a public company.
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Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
| ● | the initiation, progress, timing, costs and results of clinical trials for our product candidates; |
| ● | the clinical development plans we establish for each product candidate; |
| ● | the number and characteristics of product candidates that we develop or may in-license; |
| ● | the terms of any collaboration agreements we may choose to execute; |
| ● | the outcome, timing and cost of meeting regulatory requirements established by the U.S. Drug Enforcement Administration, the FDA, the European Medicines Agency or other comparable foreign regulatory authorities; |
| ● | the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights; |
| ● | the cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us; |
| ● | costs and timing of the implementation of commercial scale manufacturing activities; |
| ● | the cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval in regions where we choose to commercialize our products on our own; and |
| ● | the costs to defend litigation; |
To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we must finance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or other financing alternatives. We have no committed external sources of funds. Additional equity or debt financing or collaboration and licensing arrangements may not be available on acceptable terms, if at all.
If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.
Liquidity
Since inception, we have been engaged in organizational activities, including raising capital and research and development activities. We have not generated revenues and have not yet achieved profitable operations, nor have we ever generated positive cash flow from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. We are subject to those risks associated with any preclinical stage pharmaceutical company that has substantial expenditures for research and development. There can be no assurance that our research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, we operate in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. Further, our future operations are dependent on the success of our efforts to raise additional capital.
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We incurred a net loss of $5,137,002 and $2,379,271 for the three months ended March 31, 2022 and 2021, respectively, and had an accumulated deficit of $27,840,909 as of March 31, 2022. We anticipate incurring additional losses until such time, if ever, that we can generate significant revenue from our product candidates currently in development. Our primary source of capital has been the issuance of debt and equity securities. We closed our initial public offering in February 2021 and an underwritten public offering in September 2021, raising net proceeds of $15,783,207 and $36,999,465, respectively. Our cash on hand as of March 31, 2022 was $30,797,135.
Management believes that current cash is sufficient to fund operations and capital requirements for at least 12 months from the filing of this quarterly report. Additional financings will be needed by us to fund our operations, to complete clinical development of and to commercially develop our product candidates. There is no assurance that such financing will be available when needed or on acceptable terms. We also have the ability to curtail spending in research and development activities in order to conserve cash.
Global Pandemic Outbreak
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic. The outbreak has become increasingly widespread in the United States, impacting the markets in we operate. While the full impact of the pandemic continues to evolve, the financial markets have been subject to significant volatility that adversely impacts our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing initiatives. The uncertain financial markets, disruptions in supply chains, mobility restraints, and changing priorities as well as volatile asset values also affect our ability to enter into collaborations, joint ventures, and license and royalty agreements. The outbreak and government measures taken in response to the pandemic have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, have spiked, while demand for other goods and services, such as travel, have fallen. The future progression of the pandemic and its effects on our business and operations are uncertain. We may face difficulties recruiting or retaining patients in our ongoing and planned clinical trials if patients are affected by the virus or are fearful of traveling to our clinical trial sites because of the outbreak. We and our third-party contract manufacturers, contract research organizations, and clinical sites may also face disruptions in procuring items that are essential to our research and development activities, including, for example, medical and laboratory supplies used in our clinical trials or preclinical studies, in each case, that are sourced from abroad or for which there are shortages because of ongoing efforts to address the outbreak.
In addition, the global macroeconomic environment could be negatively affected by, among other things, COVID-19 or other pandemics or epidemics, instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom from the European Union, the Russian invasion of the Ukraine and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets.
While expected to be temporary, these disruptions may negatively impact our results of operations, financial condition, and liquidity in 2022 and potentially beyond.
Factors that May Affect Future Results
You should refer to Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of important factors that may affect our future results.
Discussion of Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in conformity with GAAP requires us to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in our financial statements and accompanying notes. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. During the three months ended March 31, 2022, there were no significant changes to our critical accounting policies from those described in our annual financial statements for the year ended December 31, 2021, which we included in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Evaluation of Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting.
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part II – Other information
ITEM 1: LEGAL PROCEEDINGS
On March 12, 2021, we and Mr. Mack (the “Defendants”) were named as defendants in a complaint (the “Complaint”) filed by Sorrento Therapeutics, Inc. (“Sorrento”), and Scilex Pharmaceuticals Inc. (“Scilex” and together with Sorrento, the “Plaintiffs”) in the Court of Chancery of the State of Delaware. In the Complaint, Plaintiffs alleged (i) Mr. Mack breached a Restrictive Covenants Agreement, dated as of November 8, 2016, between himself and Sorrento (the “Restrictive Covenants Agreement”), (ii) we tortiously interfered with the Restrictive Covenants Agreement, and (iii) we tortiously interfered with Scilex’s relationship with Mr. Mack. On May 7, 2021 Plaintiffs filed an Amended Complaint asserting the same three causes of action. On September 28, 2021, Plaintiffs filed a Second Amended Complaint asserting the same three causes of action as the prior complaints, as well as claims in which Plaintiffs allege (i) Mr. Mack breached an Employment, Proprietary Information and Inventions Agreement, dated as of October 25, 2016, between himself and Sorrento (the “Employment Agreement”), (ii) we tortiously interfered with the Employment Agreement, (iii) Mr. Mack breached his fiduciary duties to Scilex, and (iv) we aided and abetted Mr. Mack’s alleged breach of fiduciary duties to Scilex. On April 1, 2022, Plaintiffs filed a Third Amended Complaint. The Third Amended Complaint asserts the same causes of action as the Second Amended Complaint, as well as claims for (i) misappropriation of trade secrets by Defendants under Delaware law, and (ii) misappropriation of trade secrets by Defendants under California law. On April 18, 2022, Defendants filed answers to the Third Amended Complaint. Pursuant to a scheduling order entered February 22, 2022, trial is set for September 12 to 14, 2022. We intend to vigorously defend the action. However, we are unable to predict the ultimate outcome of the lawsuit at this time.
ITEM 1A: RISK FACTORS
Our operations and financial results are subject to various risks 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 filed with the Securities and Exchange Commission on March 31, 2022. There have been no other material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
| Exhibit No. | Description | |
| 31.1 | Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a). | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a). | |
| 32.1** | Certification of Principal Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b). | |
| 32.2** | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b). | |
| 101.INS* | Inline XBRL Instance Document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
| * | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
| ** | Furnished, not filed. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on May 16, 2022.
| VIRPAX PHARMACEUTICALS, INC. | ||
| Date: May 16, 2022 | By: | /s/ Anthony P. Mack |
| Anthony P. Mack | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ Christopher Chipman | ||
| Christopher Chipman | ||
| Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
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