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 central nervous system (“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 $18,663,607
and $7,938,434 for the nine months ended September 30, 2022 and 2021, respectively, and had an accumulated deficit of $41,367,514 as of
September 30, 2022. The Company anticipates incurring additional losses until such time, if ever, that it can generate significant revenue
from its product candidates currently in development. The Company’s primary source of capital has been the issuance of debt and
equity securities.
On September 16, 2021, the Company completed an
underwritten public offering of 6,670,000 shares of its common stock at a price of $6.00 per share (the “Underwritten Public Offering”).
The gross proceeds from the Underwritten Public Offering were $40.0 million. The net proceeds to the Company from the Underwritten Public
Offering were approximately $37.0 million, after deducting underwriting discounts, commissions and offering expenses payable by the Company.
The Company is currently involved in defending
litigation and intends to vigorously defend the action. The Company has established an estimated litigation liability of $2.0 million
in respect of the litigation. (Please also see Note 5. Commitments and Contingencies for more details).
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.
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 September 30,
2022, and its results of operations and its cash flows for the three and nine months ended September 30, 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 prepaid expenses, estimated litigation liability, 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 loss 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 September 30, 2022 | | |
Three Months Ended September 30, 2021 | | |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
Equivalent common shares | |
| | |
| | |
| | |
| |
Stock options | |
| 1,172,281 | | |
| 669,067 | | |
| 1,172,281 | | |
| 669,067 | |
Warrants | |
| 18,436 | | |
| 18,436 | | |
| 18,436 | | |
| 18,436 | |
Unvested restricted stock awards | |
| 711 | | |
| 10,420 | | |
| 711 | | |
| 10,420 | |
Cash —At times, the Company’s
cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation. Total cash was $20,562,611 and $36,841,992
as of September 30, 2022 and December 31, 2021, respectively.
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 50% likely of being realized upon ultimate finalization with the taxing authority. The Company recognizes the impact
of an uncertain income tax position in the financial statements if it believes that the position is more likely than not to be sustained
by the relevant taxing authority. The Company will recognize interest and penalties related to tax positions in income tax expense. As
of September 30, 2022, the Company had no uncertain income tax positions.
Note 3. Prepaid Expenses and Other Current
Assets
Prepaid expenses and other current assets consists
of the following:
| |
September 30, 2022 | | |
December 31, 2021 | |
Prepaid insurance | |
$ | 453,692 | | |
$ | 152,801 | |
Research and development | |
| 2,593,185 | | |
| 2,466,140 | |
Legal retainer | |
| — | | |
| 103,050 | |
Other prepaid expenses and current assets | |
| 26,273 | | |
| 8,453 | |
| |
$ | 3,073,150 | | |
$ | 2,730,444 | |
Note 4. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists
of the following:
| |
September 30, 2022 | | |
December 31, 2021 | |
Accrued payroll | |
$ | 311,227 | | |
$ | 627,281 | |
Research and development expenses | |
| 1,050,815 | | |
| 930,561 | |
Estimated litigation liability | |
| 2,000,000 | | |
| — | |
Insurance premiums | |
| 223,933 | | |
| — | |
Legal expenses | |
| 604,050 | | |
| 510,008 | |
Accounting consulting fees | |
| 3,519 | | |
| 4,166 | |
Tax expenses | |
| — | | |
| 8,000 | |
Other | |
| 14,321 | | |
| 7,675 | |
| |
$ | 4,207,865 | | |
$ | 2,087,691 | |
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 the Company’s
Chief Executive Officer, Anthony P. 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 alleged (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. Trial was held before Vice Chancellor Paul Fiorvanti from September 12 through September 14, 2022.
Post-trial briefing is scheduled to be completed by December 12, 2022, and post-trial argument is scheduled for December 22, 2022. The
Company intends to vigorously defend the action. However, the Company is unable to predict the ultimate outcome of the lawsuit. Plaintiffs
asserted alternative damages theories that would imply potential damages up to approximately $35.0 million. The Company countered that
actual damages, even if Plaintiffs establish liability, could be zero because, among other things, Plaintiffs’ calculations use
various unsupported assumptions, any alleged damages are speculative in nature, and there is a possibility the Company’s product
candidates never reach market. To date, the parties have not had successful settlement negotiations. Based on the foregoing, the Company
accrued $2 million in respect of the litigation. While the Company believes it has meritorious defenses, the ultimate resolution of the
action could result in a material loss.
Global Pandemic Outbreak
The
Company continues to monitor the impact of the COVID-19 pandemic on its business, the extent of which will depend on a number
of factors, including, but not limited to, the extent and severity of the impact on the Company’s service providers, suppliers,
contract research organizations and its preclinical trials, all of which are uncertain and cannot be predicted.
While
the full impact of the pandemic continues to evolve, the financial markets have been subject to significant volatility that may adversely
impact 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 may 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 Company may face difficulties recruiting or retaining patients in its ongoing and planned preclinical
and clinical trials if patients are affected by the virus or are fearful of traveling to the Company’s clinical trial sites. The
Company and its third-party CMOs, clinical research organizations (“CROs”), and clinical sites may also face disruptions in
procuring items that are essential to the Company’s research and development activities, including, for example, medical and laboratory
supplies used in the Company’s preclinical studies that are sourced from abroad or for which there are shortages because of ongoing
efforts to address the outbreak.
The extent to which the COVID-19 pandemic may
in the future impact the Company’s financial condition, liquidity or results of operations is uncertain. 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 10,000,000, with a
par value of $0.00001 per share.
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 100,000,000, with a par
value of $0.00001 per share.
On February 19, 2021, the Company issued 1,800,000
shares of common stock related to the Company’s initial public offering (“IPO”), for net proceeds totaling $15,783,207,
after deducting underwriting discounts and offering expenses. On September 16, 2021, the Company issued 6,670,000 shares of common stock
in the Underwritten Public Offering, for net proceeds totaling $36,999,465, after deducting underwriting discounts and offering expenses.
The Company issued 45,448 shares of the Company’s
common stock upon the exercise of 87,751 options in a cashless exercise during the three months ended September 30, 2021.
Warrants
In conjunction with the IPO, the Company granted
the underwriters warrants to purchase 90,000 shares of the Company’s common stock at an exercise price of $12.50 per share, which
is 125% of the initial public offering price. The warrants have a five-year term. The fair value allocated to the warrants of $639,000
was accounted for as a component of stockholders’ equity during the three months ended March 31, 2021. The fair value of the warrants
was estimated using the Black-Scholes option-pricing model and is affected by the Company’s share fair value as well as assumptions
regarding a number of complex and subjective variables, including a term of 5 years, expected price volatility of 100%, and a risk-free
interest rate of 0.6%.
There were warrants to purchase 18,436 shares
of the Company’s common stock outstanding as of September 30, 2022. There were no warrants granted or during the three and nine
months ended September 30, 2022 and 2021, respectively. The Company issued 40,221 shares of the Company’s common stock upon the
exercise of 76,620 warrants in a cashless exercise during the three months ended September 30, 2021.
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 “2017 Plan”). The Company’s Board of Directors
(the “Board”), 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 September 30, 2022 and December 31, 2021,
there were 711 and 6,196 of unvested restricted stock awards issued totaling $7,030 and $39,862, respectively, based on a fair value of
the Company’s common stock on the respective date of grant.
During the three months ended September 30, 2022
and 2021, there were no restricted stock awards granted during the periods and 131 and 640 shares of restricted stock awards were forfeited
during both the three months ended September 30, 2022 and 2021, respectively. The Company recognized $4,688 and $22,013 of stock based
compensation for vested restricted shares during the three months ended September 30, 2022 and 2021, respectively. In addition, during
the nine months ended September 30, 2022 and 2021, there were 0 and 15,000 restricted stock awards granted during the periods, respectively,
and 451 of restricted stock awards forfeited during the nine months ended September 30, 2022. The Company recognized $32,831 and $57,425
of stock based compensation for vested restricted shares during the nine months ended September 30, 2022 and 2021, respectively.
Stock Options
On June 14, 2022, the Company established the
Virpax Pharmaceuticals, Inc. 2022 Equity Incentive Plan (the “2022 Plan”) and no new grants of awards will be made under the
2017 Plan and all new grants of awards will be made under the 2022 Plan. The 2022 Plan and 2017 Plan are 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 2022 Plan enables the Company to continue to provide equity and equity-based awards to eligible employees,
officers, non-employee directors and other individual service providers by reserving 1,500,000 shares of the Company’s common stock
for issuance under the 2022 Plan, subject to annual increase (like the 2017 Plan) under the 2% “evergreen” provision of the
2022 Plan (discussed further below). The Company believes that offering ownership interests in the Company is a key factor in retaining
and recruiting employees, officers, non-employee directors and other individual service providers, and aligning and increasing their interests
in the Company’s success.
The 2022 Plan (which is summarized below) is substantially
similar to the 2017 Plan, except for (i) the increase in shares of common stock reserved for issuance as discussed above, and (ii) the
elimination of annual limitations on grants of awards to eligible individuals and certain other provisions which had been included in
the 2017 Plan in order to satisfy (now repealed) provisions of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the “Code”).
The 2022 Plan reserves an aggregate of (i) 1,500,000
shares of our common stock for the issuance of awards under the 2022 Plan (all of which may be granted as an Incentive Stock Option, or
ISOs) and provided for the rollover of all unused shares of common stock reserved under our 2017 Plan or 479,078 share of our common stock,
plus (ii) an additional number of shares of common stock subject to outstanding awards under the 2017 Plan that become forfeited
or canceled without payment or which are surrendered in payment of the exercise price and/or withholding taxes (collectively, the “Share
Limit”). Pursuant to the 2022 Plan’s “evergreen” provision, the Share Limit shall be cumulatively increased on
January 1, 2023, and on each January 1 thereafter, by 2% of the number of shares of common stock issued and outstanding on the
immediately preceding December 31 or such lesser number of shares as determined by our Board.
In applying the aggregate share limitation under
the 2022 Plan, shares of common stock (i) subject to awards that are forfeited, cancelled, returned to the Company for failure to
satisfy vesting requirements or otherwise forfeited, or terminated without payment being made thereunder and (ii) that are surrendered
in payment or partial payment of the exercise price of an option or stock appreciation right or taxes required to be withheld with respect
to the exercise of Stock Options or stock appreciation rights or in payment with respect to any other form of award are not counted and,
therefore, may be made subject to new awards under the 2022 Plan.
The 2022 Plan provides that:
| ● | on
January 1 of each year, each non-employee director will be granted Stock Options under the 2022 Plan to purchase 15,000 shares
of our common stock. |
| ● | each
new non-employee director will be granted Stock Options under the 2022 Plan to purchase up to 25,000 shares of our common stock,
as determined by the Compensation Committee, at the time the individual first becomes a director. |
| ● | on
January 1, of each year, each then serving non-Chair member of the Audit Committee, the Compensation Committee, the Nominating and
Corporate Governance Committee and the Science and Technology Committee shall automatically be granted Stock Options to purchase 5,000
shares of common stock under the 2022 Plan, and the Chair of the Audit Committee, the Compensation Committee, the Nominating and Corporate
Governance Committee and the Science and Technology Committee shall each be granted Stock Options to purchase 10,000 shares of common
stock under the 2022 Plan. |
All such options will become exercisable on the
one-year anniversary of the date of grant.
There was no stock option activity and no stock
options outstanding under the 2022 Plan for the nine months ended September 30, 2022.
Stock-based compensation expense for the three
months ended September 30, 2022 and 2021 was $150,717 and $141,773, respectively. The Company recorded $113,821 and $121,584 of this stock-based
compensation within general and administrative expense and $36,896 and $20,189 within research and development expense on the accompanying
statement of operations for the three months ended September 30, 2022 and 2021, respectively. Stock-based compensation expense for the
nine months ended September 30, 2022 and 2021 was $606,758 and $833,084, respectively. The Company recorded $497,275 and $794,462 of this
stock-based compensation within general and administrative expense and $109,483 and $38,622 within research and development expense on
the accompanying statement of operations for the nine months ended September 30, 2022 and 2021, respectively.
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 nine months ended September
30, 2022 and 2021 were valued using the Black-Scholes option-pricing model with the following weighted-average assumptions:
| |
For
the Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | |
Expected term (years) | |
| 5.65 | | |
| 5.75 | |
Risk-free interest rate | |
| 1.96 | % | |
| 1.04 | % |
Expected volatility | |
| 77.12 | % | |
| 79.07 | % |
Expected dividend yield | |
| 0.00 | % | |
| 0.00 | % |
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 2017 Plan for the nine months ended September 30, 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 | |
| 486,101 | | |
$ | 9.89 | | |
| 8.68 | | |
$ | - | |
Forfeited | |
| (5,000 | ) | |
| 4.62 | | |
| | | |
| | |
Exercised | |
| (87,751 | ) | |
| 9.89 | | |
| | | |
| | |
Granted | |
| 275,717 | | |
| 4.62 | | |
| - | | |
| - | |
Options outstanding at December 31, 2021 | |
| 669,067 | | |
| 7.75 | | |
| 8.34 | | |
| - | |
Forfeited | |
| (15,591 | ) | |
| 3.14 | | |
| | | |
| | |
Cancelled | |
| - | | |
| - | | |
| | | |
| | |
Granted | |
| 518,805 | | |
| 2.26 | | |
| - | | |
| - | |
Options outstanding at September 30, 2022 | |
| 1,172,281 | | |
$ | 5.38 | | |
| 8.36 | | |
$ | - | |
Options exercisable at September 30, 2022 | |
| 620,734 | | |
$ | 7.71 | | |
| 7.62 | | |
$ | - | |
On January 31, 2022, our Board approved
an equity compensation award for the Company’s officers and employees. The Board approved this award of options to purchase an aggregate
of 321,204 shares of Common Stock pursuant to the 2017 Plan. The options, other than Mr. Mack’s, have an exercise price of $2.13
per share, the fair market value of the Common Stock on the date of grant. Mr. Mack’s options have an exercise price of $2.34 per
share, which represents 110% of the fair market value on the date of grant. The options granted to the officers and employees vest in
three equal installments beginning on the one-year anniversary of the grant date and have a ten-year expiration date.
On January 1, 2022, options were granted to the
Non-Employee Directors pursuant to the 2017 Plan to purchase an aggregate of 77,601 shares of Common Stock. The options have an exercise
price of $3.43 per share, the fair market value of the Common Stock on the date of grant. The options granted to the directors will vest
upon the one-year anniversary of the grant date and have a ten-year expiration date.
On April 25, 2022, options were granted to a consultant
pursuant to the 2017 Plan to purchase an aggregate of 60,000 shares of Common Stock. The options have an exercise price of $1.76 per share,
the fair market value of the Common Stock on the date of grant. The options granted to the consultant will vest upon the one-year anniversary
of the grant date and have a ten-year expiration date. Options were also granted to the Company’s EVP Commercial Operations and
director pursuant to the 2017 Plan to purchase an aggregate of 60,000 shares of Common Stock. The options have an exercise price of $1.76
per share, the fair market value of the Common Stock on the date of grant. The options granted to this individual vest immediately upon
grant and have a ten-year expiration date.
The weighted-average grant-date fair value of
stock options granted during the nine months ended September 30, 2022 was $1.54. The weighted-average grant-date fair value of stock options
granted during the nine months ended September 30, 2021 was $3.06.
As of September 30, 2022, there was $652,750 of
total time-based unrecognized compensation costs related to unvested stock options stock. These costs are expected to be recognized over
a weighted average period of 1.91 years.
Note 8. Related-Party Transactions
In October 2018 and January 2019, the Company
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 the Company’s Underwritten Public Offering in September 2021.
In addition, in January 2021, the Company 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 the IPO in February 2021.
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 $1,052,000. This balance was paid off in September 2021 with proceeds from the Underwritten Public Offering.
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 1.150 million upon the achievement of specified development milestones (payable in Great British Pounds). Additional milestone payments
are due upon the achievement of certain development and commercial milestones achieved outside the United States, payable on a country-by-country
basis. Royalty payments must be paid to MedPharm in an amount equal to a single-digit percentage of net sales of all MedPharm Product
sold by us during the royalty term in the territory. Royalties shall be payable, on a country-by-country basis, during the period of time
commencing on the first commercial sale and ending upon the expiration of the last-to-expire patent claim on the licensed product, which
is set to expire on December 4, 2028. Each party has the right to terminate the agreement in its entirety upon written notice to the other
party if such other party is in material breach of the agreement and has not cured such breach within ninety (90) days after notice from
the terminating party indicating the nature of such breach.
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 the LipoCure Agreement, the Company was required to pay
an upfront fee upon signing of $150,000 and is required to make future milestone and royalty payments to LipoCure. The Company is obligated
to make aggregate milestone payments of up to $19.8 million upon the achievement of specified development and commercial milestones. Royalty
payments must be paid in an amount equal to a single digit to low double-digit percentage of annual net sales of royalty qualifying products,
subject to certain adjustments. Royalties shall be payable during the period of time, on a country-by-country basis, commencing on the
first commercial sale and ending upon the expiration of the last-to-expire patent claim on the licensed product, which is set to expire
on July 24, 2030. Each party has the right to terminate the agreement in its entirety upon written notice to the other party if such other
party is in material breach of the agreement and has not cured such breach within ninety (90) days after notice from the terminating party
indicating the nature of such breach.
Nanomerics Ltd.
Nanomerics Collaboration Agreement
On April 11, 2019, the Company entered into an
exclusive collaboration and license agreement, as amended (the “Nanomerics Collaboration Agreement”), with Nanomerics Ltd.,
a company organized and existing under the laws of United Kingdom (“Nanomerics”), for the exclusive world-wide license to
develop and commercialize products, including NES100, which contain hydrophilic neuropeptide Leucin5-Enkephalin and an amphiphile compound
which is quaternary ammonium palmitoyl glycol chitosan, to engage in a collaborative program utilizing Nanomerics’ knowledge, skills
and expertise in the clinical development of products and to attract external funding for such development. The Nanomerics Collaboration
Agreement was also amended to include a program for the preclinical development of a product for post-traumatic stress disorder.
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 $103 million upon the achievement of specified development
and commercial milestones, and sublicense fees for any sublicense relationships we enter into subsequent to the Nanomerics Collaboration
Agreement. The Company’s obligation to pay royalties, on a country-by-country basis, shall commence on the date of first commercial
sale of its licensed products and shall expire with respect to each separate licensed product, on the latest to occur of (a) the tenth
(10th) anniversary of the first commercial sale of the first licensed product; (b) the expiration date of the last to expire of any valid
claim (patent is set to expire on November 3, 2034); and, (c) the date upon which a generic product has been on the market for a period
of no fewer than ninety (90) days. The Company has the right to terminate the agreement upon 180 days prior written notice to Nanomerics.
Upon termination, the Company shall assign to Nanomerics all its right title and interest in all results other than results specific to
(a) the Device (as defined in the Nanomerics Collaboration Agreement), including its manufacture or use; and (b) the Technology, but excluding
any clinical Results relating to the Compound or Licensed Products (all terms as defined in the Nanomerics Collaboration Agreement).
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 a viral barrier to prevent or reduce the risk or the intensity
of viral infections. The Amended Nanomerics License Agreement provides for payments up to $5.5 million upon the achievement of specified
development milestones and profit share payments equal to between 30% to 40% of certain profits (as set forth in the Amended Nanomerics
License Agreement), payable to Nanomerics upon the achievement of specified commercial milestones. The profit share payments are triggered
upon determination by the FDA that AnQlar may be marketed as an Over-the-Counter product in the United States. In the event the profit
share payments are not triggered as defined above, the Company’s would be obligated to pay royalties within a range of 5% to 15%
of annual net sales of royalty qualifying products and commercial milestones on a worldwide basis amounting to aggregate milestone payments
of up to $112.5 million upon the achievement of these commercial milestones. The Amended Nanomerics License Agreement also provides for
additional aggregate milestone payments totaling $999,999 upon first receipt of regulatory approval for a licensed product in the European
Union, Asia/Pacific region and South America/Middle East region. The Company’s obligation to pay royalties, on a country-by-country
basis, shall commence on the date of first commercial sale of its licensed products and shall expire with respect to each separate licensed
product, on the latest to occur of (a) the tenth (10th) anniversary of the first commercial sale of the first licensed product; (b) the
expiration date of the last to expire of any valid claim; and, (c) the date upon which a generic product has been on the market for a
period of no fewer than ninety (90) days. The Company has the right to terminate the Nanomerics License Agreement upon sixty (60) days’
prior written notice to Nanomerics. Upon termination, the Company shall assign to Nanomerics all its rights, title and interest in all
of its results. Nanomerics has the right to terminate the agreement upon sixty (60) days’ prior written notice. In consideration
for entering into this Amended Nanomerics License Agreement, the Company paid Nanomerics a nonrefundable fee of $1,500,000 in March 2022,
which is included in research and development expenses during the nine months ended September 30, 2022.
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 5% to 15% of annual net sales of royalty qualifying products. The Company’s obligation
to pay royalties, on a country-by-country basis, shall commence on the date of first commercial sale of its licensed products and shall
expire with respect to each separate licensed product, on the latest to occur of (a) the tenth (15th) anniversary of the first commercial
sale of the first licensed product; (b) the expiration date of the last to expire of any valid claim; and, (c) the date upon which a generic
product has been on the market for a period of no fewer than ninety (90) days. The Company paid an upfront milestone payment upon signing
of $200,000 and is required to make future milestone and royalty payments of up to $41 million upon the achievement of specified development
and commercial milestones, and sublicense fees for any sublicense relationships the Company enters into subsequent to the Nanomerics License
Agreement (any patent that issues from the currently filed provisional patent application would expire on August 24, 2041). The Company
has the right to terminate the Nanomerics License Agreement upon one hundred and eighty (180) days’ prior written notice to Nanomerics.
Upon termination, the Company shall assign to Nanomerics all its rights, title and interest in all of its results. Nanomerics has the
right to terminate the agreement upon thirty (30) days’ prior written notice if the Company concludes in writing to Nanomerics that
the study aim has not been achieved or the Company notifies Nanomerics that the Company has decided against proceeding with a Phase III
Clinical trial.
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 $500,000 upon
meeting this study aim in April 2022 which is included in research and development expenses during the nine months ended September 30,
2022.
Research Agreements
Yissum
On October 11, 2020, the Company entered into
an Agreement for Rendering of Research Services with Yissum (the “October 2020 Yissum Research Agreement”). Under the October
2020 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 of Liposomal Bupivacaine as well as efficacy and PK studies in animals. In consideration
for the research services, the Company agreed to pay research service fees of $81,000 in six equal monthly installments. In connection
with the completion of the Company’s IPO, the Company paid Yissum $40,500 towards the total consideration of $81,000. The Company
retains ownership in all its intellectual property rights and any intellectual property belonging to either the Company or Yissum prior
to the execution of the October 2020 Yissum Research Agreement will remain the sole property of either the Company or Yissum, respectively.
All data generated from the provision of the October 2020 Yissum Research Agreement, including any reports, which are specifically required
and contemplated under the October 2020 Yissum Research Agreement, shall be owned by the Company upon full payment of the research services
fees. Each party will be entitled to terminate the agreement in the event of a breach by the other party of its obligations under the
agreement, including, but not limited to, any payment failure, which is not remedied by the breaching party within thirty (30) days of
receipt of written notice from the non-breaching party. All services to be provided under the October 2020 Yissum Research Agreement were
completed by June 30, 2021.
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 $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 in March 2023.
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 $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. The Company also agreed to pay $250,000 to Lipocure upon successful completion of a Chemistry, Manufacturing
and Controls “CMC” filing with the U.S. Food and Drug Administration (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. The
Company recorded $270,000 and $600,000 in research and development expense respectively for the three months ended September 30, 2022
and 2021 associated with this agreement. The Company recorded $900,000 and $600,000 in research and development expense respectively for
the nine months ended September 30, 2022 and 2021 associated with this agreement.
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.
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. The term of the CRADA is for a period of four years from May 6, 2020 (the effective date of the
agreement) and can be terminated by both parties at any time by mutual written consent. In addition, either party may unilaterally terminate
the CRADA at any time by providing written notice of at least sixty (60) days before the desired termination date. The agreement provides
for studies that are focused on the preclinical characterization of NES100 as a novel analgesic for acute and chronic non-cancer pain,
and for studies to further develop NES100 through investigative new drug (“IND”) enabling studies. There are certain development
“Go/No Go” provisions within the agreement whereby, if certain events occur, or do not occur, NCATS may terminate the CRADA.
These “No GO” provisions include: i) lack of efficacy in all animal pain models, ii) no reliable and sensitive bioanalytical
method can be developed, iii) manufacturing failure due to inherent process scalability issues, iv) unacceptable toxicity or safety profile
to enable clinical dosing, and v) inability to manufacture the NES100 dosage form.
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 November 9, 2022.