Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read “Cautionary Note Regarding Forward-Looking Statements” and Item 1A. Risk Factors of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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Overview
Company Overview
We are a clinical stage, drug platform company addressing neurodegeneration such as Alzheimer’s disease (“AD”), Parkinson’s disease (“PD”) and Alzheimer’s disease in Down Syndrome (“AD-DS”). Our lead compound, ANVS401, is a small molecule administered orally that attacks neurodegeneration by entering the brain and inhibiting the translation of neurotoxic proteins—amyloid precursor protein APP/Aβ (“APP”), tau/phospho-tau (“tau”) and α-Synuclein (“αSYN”)—thereby improving axonal transport. Human studies in four mildly cognitive impaired patients have shown that ANVS401 lowered the levels of neurotoxic proteins and inflammatory factors. In preclinical studies, lower neurotoxic protein levels led to improved axonal transport, reduced inflammation, lower nerve cell death and improved function.
AD is a substantial market affecting over 30 million people worldwide and is expected to grow to over 100 million by 2050. While the market for neurodegeneration is over $100 billion, to date there are no disease modifying drugs for any neurodegenerative condition. Enormous efforts have gone into developing better drugs to treat neurodegeneration and the outcomes have been sobering. The results of clinical trials in AD, the two AD orphan indications AD-DS and early onset familial AD or in PD have not supported the development of successful disease modifying therapies.
ANVS401 is a small lipophilic molecule that is orally available and readily enters the brain, as demonstrated by preclinical pharmacokinetics analyses showing brain concentrations approximately six to eight times higher than plasma concentrations. ANVS401 has a mechanism of action that we believe to be unique, in that it inhibited the over-translation of and, therefore, reduced the levels of several neurotoxic proteins both in vitro and in vivo including APP, tau and αSYN.
By targeting multiple neurotoxic proteins, ANVS401 resembles a combination therapy approach, with the added convenience of being a single drug with a single drug target. Therefore, we have worked to understand how ANVS401 is able to inhibit the translation of more than one neurotoxic protein.
We are presently conducting two Phase 2a clinical trials. In collaboration with the Alzheimer’s Disease Cooperative Study (“ADCS”) we are conducting a trial in 24 early AD patients (the “ADCS Trial”). We are also conducting a Phase 2a clinical trial in 14 AD and 54 PD patients (the “AD/PD Trial”) which began treating patients in August 2020. Both clinical trials are double-blind, placebo controlled studies. Under an agreement with UC San Diego, where ADCS is located, we have contracted to provide study supplies at our cost but the remaining costs of the ADCS Trial are paid for by the National Institutes of Health (“NIH”). We have designed the two Phase 2a studies by applying our understanding of the underlying disease states in neurodegeneration and by measuring not just target, but also pathway validation in the spinal fluid of these patients. This means that we are proposing to measure as many factors as possible associated with the toxic cascade precipitated by impaired axonal transport. If we are able to show both target and pathway validation in two patient populations, we believe that our opportunity for successful Phase 3 studies is better than if we merely demonstrated target validation in one patient population.
We have never been profitable and have incurred net losses since inception. Our net losses were $5,462,047 and $990,980 for the years ended December 31, 2020 and 2019, respectively, and our accumulated deficit at December 31, 2020 was $14,239,075. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.
Financial Operations Overview
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
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Research and Development Expenses
Our research and development expenses consist of expenses incurred in development and clinical studies relating to our product candidates, including:
● expenses associated with clinical development;
● depreciation, maintenance and other facility-related expenses.
We expense all research and development costs as incurred. Clinical development expenses for our product candidates are a significant component of our current research and development expenses. Product candidates in later stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to increased size and duration of the clinical trials. We track and record information regarding external research and development expenses for each study or trial that we conduct. From time to time, we use third-party CROs, contractor laboratories and independent contractors in clinical studies. We recognize the expenses associated with third parties performing these services for us in our clinical studies based on the percentage of each study completed at the end of each reporting period.
Our research and development expenses in 2020 primarily related to the AD/PD Trial which began treating patients in August 2020 and two long-term animal toxicology studies which began in November 2019—a six-month study in rats and a nine-month study in dogs. We expect that our research and development expenses in 2021 and for the next several years will be higher than in 2020 as a result of the continuation of our AD/PD Trial and costs associated with the initiation of our planned Phase 3 trial in AD-DS. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. Completion of our clinical development and clinical trials may take several years or more and the length of time generally varies according to the type, complexity, novelty and intended use of our product candidates. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
● the number of sites included in the clinical trials;
● the length of time required to enroll suitable patients;
● the size of patient populations participating in the clinical trials;
● the duration of patient follow-ups;
● the development stage of the product candidates; and
● the efficacy and safety profile of the product candidates.
Due to the early stage of our research and development, we are unable to determine the duration or completion costs of our development of ANVS401. As a result of the difficulties of forecasting research and development costs of ANVS401 as well as the other uncertainties discussed above, we are unable to determine when and to what extent we will generate revenues from the commercialization and sale of approved product candidates.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for personnel serving in our executive, finance, accounting, legal and human resource functions. Our general and administrative expenses also include facility and related costs not included in research and development expenses, professional fees for legal services, including patent-related expenses, consulting, tax and accounting services, insurance and general corporate expenses. We expect that our general and administrative expenses will increase with the continued development and potential commercialization of our product candidates.
We expect that our general and administrative expenses in 2021 and for the next several years will be higher than in 2020 as we increase our employee count. Following our IPO in January 2020, we also anticipate increased expenses relating to our operation as a public company, including increased costs for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with additional regulations, corporate governance, internal control and similar requirements applicable to public companies, as well as increased costs for insurance.
Interest Income (Expense), net
Interest income (expense) consists primarily of interest earned on our cash and cash equivalents and interest expense on our convertible promissory notes, including amortization of deferred financing fees and debt discount.
Grant Income
Grants received are recognized as grant income in the statements of operations as and when they are earned for the specific research and development projects for which these grants are designated. In September 2019, as modified in September 2020, we received a Notice of Award for a $1.9 million grant from the National Institute on Aging of the NIH to cover the costs of long-term toxicology studies on ANVS401 in rats and dogs. The costs of the studies and the grant income were substantially completed as of December 31, 2020.
Income Taxes
As of December 31, 2020, the Company had U.S. federal net operating loss (“NOL”) carryforwards of $7,821,413, which may be available to offset future income tax liabilities. Federal NOL carryforwards generated in 2017 and prior of $2,764,240 will expire beginning 2032. The remaining federal NOL carryforwards generated in 2018 through 2020, do not expire, and following the enactment of the Coronavirus Aid, Relief, and Economic Security Act in March 2020, are permitted to offset 100% of taxable income in future years.
NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service (the “IRS”) and may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50% as defined under Sections 382 and 383 in the Internal Revenue Code. This could substantially limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on our value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years.
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.
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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 appearing at the end of this Annual Report on Form 10-K, 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.
Fair Value of Common Stock and Stock-Based Compensation
We account for grants of stock options to employees and non-employees based on their grant date fair value and recognize compensation expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using the Black-Scholes option pricing model. The Black-Scholes model requires us to make assumptions and judgments about the variables used in the calculations, including the expected term, the expected volatility of our common stock, the risk-free interest rate and the expected dividend rate.
Prior to our IPO, in the absence of a public trading market for our common stock, on each grant date, we developed an estimate of the fair value of our common stock underlying the option grants. We determined the fair value of our common stock using methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation, and based in part on input from an independent third-party valuation firm. Following the closing of our IPO on January 31, 2020, we no longer have to estimate the fair value of the common stock, rather we determine the value based on quoted market prices.
Grant Income
Grants received are recognized as grant income in the statements of operations as and when they are earned for the specific research and development projects for which these grants are designated. Grants payments received in excess of grant income earned are recognized as deferred grant on the balance sheet and grant income earned in excess of grant payments received is recognized as grant receivable on the balance sheets.
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Results of Operations
Operating expenses and other income (expense) were comprised of the following:
Year Ended
December 31,
(in thousands)
Operating expenses:
General and administrative 3,586.2 829.4
Other income (expense):
Change in fair value of derivative liability (26.5) (79.5)
Interest income (expense), net 47.2 (40.9)
Years Ended December 31, 2020 and 2019
Research and Development Expenses
Research and development expenses increased by $2,277.7 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily the result of an increase of $1,878.7 thousand in costs related to our AD/PD Trial which began treating patients in August 2020, an increase of $61.7 thousand in costs associated with our long-term toxicology studies in rats and dogs which began in November of 2019, an increase in share-based compensation expense of $138.7 thousand and an increase of $130.1 thousand in personnel expenses.
General and Administrative Expenses
General and administrative expenses increased by $2,756.8 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily the result of increases of $1,717.7 thousand in share-based compensation expense, $650.9 thousand in other personnel expenses, $307.5 thousand in insurance expense and $134.1 thousand in stock listing fees and other financial filing and printing fees.
Change in Fair Value of Derivative Liability
The derivative liability represents an embedded derivative in our convertible promissory notes which were issued in March 2019. At each balance sheet date, we estimated the fair value of the derivative liability and recognized any change in our statements of operations. The fair value of the derivative liability was adjusted to $132.5 thousand immediately prior to the closing of our IPO on January 31, 2020. Effective upon the closing of the IPO, the derivative liability was eliminated, and the amount was reclassified to additional paid-in capital on the balance sheet.
Interest Income (Expense), Net
Interest income (expense), net increased $88.1 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily the result of interest income generated on cash and cash equivalents from the proceeds of our IPO which closed on January 31, 2020 and the conversion of our convertible promissory notes to common stock in conjunction with the IPO.
Grant Income
Grant income increased $422.3 thousand for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was the result of income recognized related to a grant from the NIH to reimburse the
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costs of our long-term toxicology studies in rats and dogs, which studies began in November 2019 and were substantially completed as of December 31, 2020.
Liquidity and Capital Resources
Since our inception in 2008, we have devoted most of our cash resources to research and development and general and administrative activities. We have financed our operations primarily with the proceeds from the sale of common stock, convertible preferred stock and convertible promissory notes. To date, we have not generated any revenues from the sale of products, and we do not anticipate generating any revenues from the sales of products for the foreseeable future. We have incurred losses and generated negative cash flows from operations since inception. As of December 31, 2020, our principal source of liquidity was our cash, which totaled $8,074.7 thousand.
Equity Financings
We closed our IPO on January 31, 2020, raising gross proceeds of $13,800.0 thousand and net proceeds of $12,034.4 thousand, after deducting underwriting discounts and commissions and offering expenses.
Debt Financings
At December 31, 2020 and 2019, we had outstanding $0.0 and $530.0 thousand principal amount of convertible promissory notes, which were issued in March 2019. Upon the closing of our IPO on January 31, 2020, the outstanding convertible promissory notes plus accrued interest converted into 118,470 shares of our common stock at a 20% discount to the public offering price.
Future Capital Requirements
We expect that current cash and cash equivalents will be sufficient to fund our operations and capital requirements for at least the next 12 months. We believe that these available funds will be sufficient to complete our Phase 2a clinical trial for ANVS401 and commence the planning of our Phase 3 study in AD-DS for this product candidate. However, 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.
To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to 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.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities.
Year Ended
December 31,
(in thousands)
Statement of Cash Flows Data:
Total net cash provided by (used in):
Operating activities $ (3,970.8) $ (476.5)
Increase (decrease) in cash and cash equivalents $ 8,072.8 $ (33.4)
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Years ended December 31, 2020 and 2019
Operating Activities
For the year ended December 31, 2020, cash used in operations was $3,970.8 thousand compared to $476.5 thousand for the year ended December 31, 2019. The increase in cash used in operations was primarily the result of the costs associated with our AD/PD Trial, higher personnel expenses and insurance expense, and the payment of accounts payable, accrued license fees and other accrued expenses as of the end of the prior year.
We expect cash used in operating activities to increase in 2021 as compared to 2020 due to an expected increase in our operating losses associated with ongoing development of our product candidates, including our AD/PD Trial.
Financing Activities
Cash provided by financing activities was $12,043.6 thousand during the year ended December 31, 2020, attributable to net proceeds from our IPO of $12,034.4 thousand, after deducting underwriting discounts and commissions and offering expenses, and $9.2 thousand proceeds from the exercise of stock options.
Cash provided by financing activities was $443.1 thousand during the year ended December 31, 2019, attributable to $530.0 thousand proceeds from the sale of convertible promissory notes partially offset by the payment of $78.6 thousand deferred offering costs associated with our IPO and $8.3 thousand of fees on the issuance of the convertible promissory notes.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, except for short-term operating leases, or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Recent Accounting Pronouncements
In March 2018, the FASB issued ASU 2018-5—Income Taxes (Topic 740): Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin No. 118. This ASU provided guidance related to Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses the accounting implications of the Tax Cuts and Jobs Act of 2107 (the “Tax Act”). SAB 118 allows a company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. The Tax Act did not have a significant impact on our financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance improves and clarifies the fair value measurement disclosure requirement of ASC 820. The new disclosure requirements include the changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurement held at the end of reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The adoption of ASU 2018-13 in the first quarter of 2020 did not have a significant impact on our financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently evaluating ASU 2019-12 but do not believe the adoption of this standard will have a significant impact on our financial statements.
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Significant Contractual Obligations and Commitments
We lease our office facilities under a month-to-month operating lease.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.
JOBS Act
Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
This item is not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
Our financial statements, accompanying notes and Report of Independent Registered Public Accounting Firm are included in this Annual Report on Form 10-K beginning on page F-1, which are incorporated in this Item 8 by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. 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 such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as our principal financial and accounting officer, to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its
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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 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management utilized the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to conduct an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020. Based on the assessment, management has concluded that, as of December 31, 2020, our internal control over financial reporting was effective.
As an emerging growth company, management’s assessment of internal control over financial reporting was not subject to attestation by our independent registered public accounting firm.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers and Corporate Governance.
We incorporate the information required by this Item 10 by reference to the definitive proxy statement for our 2021 annual meeting of shareholders, to be filed with the SEC.
Item 11. Executive Compensation.
We incorporate the information required by this Item 11 by reference to the definitive proxy statement for our 2021 annual meeting of shareholders, to be filed with the SEC.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We incorporate the information required by this Item 12 by reference to the definitive proxy statement for our 2021 annual meeting of shareholders, to be filed with the SEC.
Item 13. Certain Relationships and Related Transactions and Director Independence.
We incorporate the information required by this Item 13 by reference to the definitive proxy statement for our 2021 annual meeting of shareholders, to be filed with the SEC.
Item 14. Principal Accountants Fees and Services.
We incorporate the information required by this Item 14 by reference to the definitive proxy statement for our 2021 annual meeting of shareholders, to be filed with the SEC.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report:
3. Exhibits. See (b) below.
(b) Exhibits:
ExhibitNumber Description of Exhibit
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ExhibitNumber Description of Exhibit
23.1 Consent of WithumSmith+Brown, PC.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+ Indicates management contract or compensatory plan.
(b) Financial Statement Schedules
See index to financial statements on page F-1. All schedules have been omitted because they are not required or are not applicable.
(c) None.
Item 16. Form 10-K Summary.
None.
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ANNOVIS BIO, INC.
Table of Contents
Page(s)
Report of Independent Registered Public Accounting Firm F-2
Statements of Operations for the Years ended December 31, 2020 and 2019 F-4
Statements of Cash Flows for the Years ended December 31, 2020 and 2019 F-6
Notes to Financial Statements F-7
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of Annovis Bio, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Annovis Bio, Inc. (the “Company”), as of December 31, 2020 and 2019, and the related statements of operations, statements of redeemable convertible preferred stock and stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2020 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ WithumSmith+Brown, PC
We have served as the Company’s auditor since 2019.
East Brunswick, New Jersey
March 3, 2021
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ANNOVIS BIO, INC.
Balance Sheets
As of December 31,
Assets
Current assets:
Prepaid expenses and other current assets 44,676 10,579
Long-term assets:
Deferred offering costs — 369,595
Total long-term assets — 369,595
Current liabilities:
Long-term liabilities:
Derivative liability — 106,000
Total long-term liabilities — 605,807
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock—$0.0001 par value:
Stockholders’ equity (deficit):
Total liabilities and stockholders’ equity (deficit) $ 8,119,334 $ 1,117,107
See accompanying notes to financial statements.
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ANNOVIS BIO, INC.
Statements of Operations
Year Ended December 31,
Operating expenses:
Other income (expense):
Change in fair value of derivative liability (26,500) (79,500)
Interest income (expense), net 47,225 (40,933)
Income tax expense (benefit) — —
Basic and diluted loss per common share $ (0.87) $ (3.51)
See accompanying notes to financial statements.
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ANNOVIS BIO, INC.
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)
Redeemable Convertible Preferred Stock Stockholders’ Equity (Deficit)
Total
Additional Stockholders’
Series A Series A-1 Common Stock Paid-In Accumulated Equity
Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit)
Share-based compensation expense — — — — — — 8,483 — 8,483
Share-based compensation expense — — — — — — 1,742,163 — 1,742,163
See accompanying notes to financial statements.
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ANNOVIS BIO, INC.
Statements of Cash Flows
Year Ended December 31,
Cash flows from operating activities:
Amortization of deferred financing fees 129 1,191
Amortization of debt discount 396 3,738
Change in fair value of derivative liability 26,500 79,500
Changes in assets and liabilities:
Prepaid expenses and other current assets (34,097) 5,101
Cash flows from financing activities:
Proceeds from issuance of convertible promissory notes — 530,000
Proceeds from exercise of stock options 9,217 —
Payment of deferred offering costs — (78,611)
Payment of deferred financing fees — (8,301)
Cash and cash equivalents, beginning of year 1,858 35,312
Cash and cash equivalents, end of year $ 8,074,658 $ 1,858
Supplemental disclosure of cash flow information
Deferred financing fees in accounts payable and accrued expenses $ — $ 321
See accompanying notes to financial statements.
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Annovis Bio, Inc.
Notes to Financial Statements
December 31, 2020 and 2019
(1) Nature of Business and Liquidity
Annovis Bio, Inc. (the “Company” or “Annovis”) was incorporated on April 29, 2008, under the laws of the State of Delaware. Annovis is a clinical-stage drug platform company addressing neurodegeneration such as Alzheimer’s disease (“AD”), Parkinson’s disease (“PD”) and Alzheimer’s disease in Down syndrome (“AD-DS”). The Company’s lead compound, ANVS401, is a small molecule administered orally that attacks neurodegeneration by entering the brain and inhibiting the translation of multiple neurotoxic proteins thereby improving axonal transport.
Since its founding, the Company has been engaged in organizational activities, including raising capital, and research and development activities. The Company has not generated substantial revenues and has not yet achieved profitable operations, nor has it ever generated positive cash flows 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 clinical 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 net losses of $5,462,047 and $990,980 for the years ended December 31, 2020 and 2019, respectively, and had an accumulated deficit of $14,239,075 as of December 31, 2020. 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 equity securities.
On January 28, 2020, the Company announced the pricing of its initial public offering (the “IPO”) of 2,000,000 shares of its common stock at an initial offering price of $6.00 per share. In addition, the Company granted the underwriters a 45-day option to purchase up to an additional 300,000 shares of common stock at the public offering price. The Company’s common stock commenced trading on the NYSE American on January 29, 2020 under the ticker symbol “ANVS”. The IPO closed on January 31, 2020, at which time the underwriters exercised their option to purchase 300,000 additional shares of the Company’s common stock, bringing the total number of shares of common stock sold by the Company to 2,300,000 shares. The gross proceeds from the IPO were approximately $13.8 million. The net proceeds of the IPO were approximately $12.0 million after deducting underwriting discounts, commissions and offering expenses payable by the Company. In conjunction with the IPO, the Company granted the underwriters 100,000 warrants to purchase shares of Company common stock at an exercise price of $7.50 per share, which is 125% of initial public offering price. Upon the closing of the IPO, outstanding redeemable convertible preferred stock and convertible promissory notes converted into shares of Company common stock totaling 4,117,089 and 118,470, respectively.
As of the date these financial statements are issued, management believes that the current cash and cash equivalents are sufficient to fund operations and capital requirements for at least the next 12 months. The Company will need to raise additional capital to complete clinical development of and to commercially develop its product candidates. There is no assurance that such financing will be available when needed or on acceptable terms.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
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
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U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).
(b) 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 share-based compensation expense, the valuation of the derivative liability and contingent liabilities. 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.
(c) Basic and Diluted Net Income (Loss) per Share
Basic net income (loss) per share is determined using the weighted average number of shares of common stock outstanding during each period. Diluted net income (loss) per share includes the effect, if any, from the potential exercise or conversion of securities, such as redeemable convertible preferred stock, convertible promissory notes and stock options, which would result in the issuance of incremental shares of common stock. The computation of diluted net income (loss) per shares does not include the conversion of securities that would have an anti-dilutive effect.
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At times, the Company’s cash balances may exceed the current insured amounts under the Federal Deposit Insurance Corporation (“FDIC”). Total cash was $8,074,658 and $1,858 as of December 31, 2020 and 2019, respectively.
(e) Deferred Offering Costs
Included in long-term assets as of December 31, 2019, were deferred offering costs of $369,595 incurred in connection with the Company’s IPO which primarily consisted of direct incremental legal, printing, listing and accounting fees. Offering costs of $601,635 were offset against proceeds received in the IPO and charged to additional paid-in capital in the year ended December 31, 2020. Of these offering costs, $78,611 was paid during the year ended December 31, 2019.
(f) Fair Value of Financial Instruments
The Company’s financial instruments include, cash and cash equivalents, accounts payable, accrued expenses, a derivative liability and debt. Cash and cash equivalents and the derivative liability are reported at fair value. The recorded carrying amount of accounts payable and accrued expenses reflect their fair value due to their short-term nature. The carrying value of the interest-bearing debt approximates fair value based upon the borrowing rates currently available to the Company for loans with similar terms and maturities.
(g) Research and Development
Research and development costs are expensed as incurred and are primarily comprised of personnel-related expenses and external research and development expenses incurred under arrangements with third parties, such as contract research organizations 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
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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. Depending on the timing of payments to vendors and estimated services provided, the Company will record net prepaid or accrued expenses related to these costs.
(h) Grant Income
Grants received are recognized as grant income in the statements of operations as and when they are earned for the specific research and development projects for which these grants are designated. Grants payments received in excess of grant income earned are recognized as deferred grant on the balance sheet and grant income earned in excess of grant payments received is recognized as grant receivable on the balance sheets.
(i) Share-Based Compensation
Share-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. Forfeitures are recognized in compensation expense in the period when they occur.
Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including, in the case of stock options, the expected life of the option and expected share price volatility. The expected life of options was estimated using the simplified method, as the Company has limited historical information to develop reasonable expectations about future exercise patterns and post-vesting employment.
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 represent 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.
Upon exercise of stock options, the Company issues shares first from treasury stock, if available, then from authorized but unissued shares.
(j) Income Taxes
The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2020 and 2019, the Company had a full valuation allowance against its deferred tax assets.
The Company is subject to the provisions of ASC 740, Income Taxes, which prescribes a more likely-than-not threshold for the financial statement recognition of uncertain tax positions. ASC 740 clarifies the accounting for income taxes by prescribing a minimum recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. There are currently no open federal or state tax audits. The Company has not recorded any liability for uncertain tax positions at December 31, 2020 or December 31, 2019.
(k) Recent Accounting Pronouncements
In March 2018, the FASB issued ASU 2018-5—Income Taxes (Topic 740): Amendments to SEC Paragraphs pursuant to SEC Staff Accounting Bulletin No. 118. This ASU provided guidance related to Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses the accounting implications of the Tax Cuts and Jobs Act of 2107 (the “Tax Act”). SAB 118 allows a company to record provisional amounts during a
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measurement period not to extend beyond one year of the enactment date and was effective upon issuance. The Tax Act did not have a significant impact on the Company’s financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance improves and clarifies the fair value measurement disclosure requirement of ASC 820. The new disclosure requirements include the changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurement held at the end of reporting period and the explicit requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The other provisions of ASU 2018-13 also include eliminated and modified disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. The adoption of ASU 2018-13 in the year ended December 31, 2020 did not have a significant impact on the Company’s financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company does not believe the adoption of this standard will have a significant impact on its financial statements.
(l) Reverse Stock Split
On July 31, 2019, the board of directors (the “Board”) and shareholders of the Company approved a reverse stock split of the Company’s common stock at a ratio of one share for every 1.4 shares previously held. All common stock share and per-share data included in these financial statements have been retroactively adjusted to reflect the reverse stock split.
(3) Fair Value Measurements
The Company measures certain assets and liabilities at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (the exit price) in an orderly transaction between market participants at the measurement date. The guidance in ASC 820 outlines a valuation framework and creates a fair value hierarchy that serves to increase the consistency and comparability of fair value measurements and the related disclosures. In determining fair value, the Company maximizes the use of quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. The fair value hierarchy is broken down into three levels based on the source of inputs as follows:
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations based on observable inputs and quoted prices in active markets for similar assets and liabilities.
Level 3—Valuations based on unobservable inputs and models that are supported by little or no market activity.
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The following table provides the carrying value and fair value of certain financial assets and liabilities of the Company measured at fair value on a recurring basis as of December 31, 2020 and December 31, 2019:
Fair Value Measurement at
Carrying Value Level 1 Level 2 Level 3
Fair Value Measurement at
Carrying Value Level 1 Level 2 Level 3
Cash and cash equivalents $ 1,858 $ 1,858 $ — $ —
The derivative liability was associated with the March 2019 issuance of convertible promissory notes (see Note 7). The Company computed the fair value at the date of issuance of $26,500 related to the embedded share settlement feature providing for conversion of the notes at a 20% discount to the price of the shares issued in a Qualified Financing. The Company estimated the fair value using a probability weighted approach. Using the same methodology, the Company determined the fair value of the derivative liability immediately prior to the closing of the IPO was $132,500 and at December 31, 2019 was $106,000. The change in the fair value of the derivative liability is reflected in the statements of operations.
(4) Grant Receivable
In September 2019, as modified in September 2020, the Company received a Notice of Award for a $1.9 million grant from the National Institute on Aging of the National Institutes of Health (the “NIH”) to cover costs of long-term chronic toxicology studies of ANVS401 in rats and dogs. The Company began the long-term chronic toxicology studies in November 2019. The Company recognized grant income of $1,157,449 and $735,075 for the years ended December 31, 2020 and 2019, respectively, in connection with the NIH grant. The Company received payments under the grant of $1,892,524 and $0 during the years ended December 31, 2020 and 2019, respectively and recorded a grant receivable of $0 and $735,075 as of December 31, 2020 and 2019, respectively, to reflect unreimbursed, eligible costs incurred under the grant. As of December 31, 2020, remaining funds available under the grant were $36,754.
(5) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
As of December 31,
Prepaid insurance $ 26,542 $ —
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(6) Accrued Expenses
Accrued expenses consisted of the following:
As of December 31,
Accrued interest expense — 36,041
See Note 8 for further detail on the accrued license payments.
(7) Convertible Promissory Notes
In March 2019, the Company issued convertible promissory notes (the “Notes”) to various investors in the aggregate principal amount of $530,000. Interest accrued at 8% compounded annually on all Notes. The maturity date was the earlier of a Liquidity Event or upon the written demand of the holders of a majority of the outstanding principal amount of the Notes made any time after December 31, 2023. A Liquidity Event was defined as (i) the date of the closing of a merger or reorganization of the Company with another entity; (ii) the sale of substantially all of the assets of the Company in which the Company’s stockholders own less than 50% of the equity securities after the event; or (iii) a liquidation of the Company.
The Company incurred costs of $8,622 in connection with the issuance of the Notes. In addition, on issuance, the Company recognized a discount associated with the Notes of $26,500 related to the fair value of an embedded derivative reflecting the share-settlement provision upon the closing of a Qualified Financing. Unamortized deferred financing fees and debt discount were deducted from the face amount of the Notes on the balance sheets. The Company amortized the deferred financing fees and debt discount over the term of the Notes as additional interest expense using the effective interest method. The effective interest rate on the Notes was 9.8%. The Company made no cash payments for interest during the years ended December 31, 2020 or 2019.
On January 31, 2020, the Company closed its IPO. In accordance with the terms of the Notes, the outstanding Notes plus accrued interest converted into 118,470 shares of Company common stock at a 20% discount to the initial offering price of shares issued in the IPO.
(8) Commitments and Contingencies
(a) Leases
The Company leases its office facilities under a month-to-month operating lease. Total rental expense was $41,603 and $34,351 for the years ended December 31, 2020 and 2019, respectively.
(b) License Agreement
In November 2008, the Company licensed the rights to certain chemical compounds, know-how and intellectual property rights that may be suitable for the development of human therapeutics. Currently, the intellectual property rights are owned by a subsidiary of Horizon Therapeutics, PLC (“Licensor”). Payments by the Company under the license agreement include a one-time non-refundable fee of $50,000, a minimum annual fee of $40,000 commencing in 2009, milestone payments upon attainment of certain milestone events, royalties based on net sales of products covered by the patent-related rights and a portion of any sublicense income received by the Company. The Company is responsible for the development and commercialization of the licensed products.
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In May 2012, such license agreement was amended. The minimum annual fee was increased to $46,000 and may be deferred by the Company until the Company raises at least $2 million in equity financing, then the aggregate annual payments of all amounts will become payable. The Company had deferred payment of the minimum annual fees prior to the IPO. During the year ended December 31, 2020, the Company paid an aggregate of $494,000 to the Licensor in satisfaction of deferred minimum annual fees through November 2020.
At December 31, 2020 and December 31, 2019, the Company had accrued $3,833 and $506,000, respectively, in license payments under the terms of this license, included in accrued liabilities. Expenses related to the license agreement are recognized in general and administrative expense in the statements of operations.
In further consideration for the licenses granted, the Company shall make the following milestone payments to Licensor based upon the attainment of each milestone event indicated below.
Milestone Event Amount
Commencement of Phase II $ 230,000
Commencement of Phase III $ 575,000
Receipt of Regulatory Approval in the United States $ 5,750,000
Receipt of Regulatory Approval outside the United States $ 5,750,000
No milestones have been achieved as of December 31, 2020.
Royalties shall be paid to Licensor assessed on net sales of licensed products on a country-by-country basis in an amount equal to 5.75%. Should the Company be required to obtain a license from a third party in order to sell a licensed product, the Company may deduct 50% of the royalties on such licensed product paid to the third party subject to certain minimums.
In addition to the royalties the Company shall pay Licensor 9.2% of all sublicense income attributable to licensed products.
The Licensor also granted the Company a buy-out option which may be exercised at any time during the term of the agreement. The option price will be as follows: $500,000 if exercised prior to the commencement of the first Phase II clinical trial; $1,000,000 if exercised on or after the commencement of the first Phase II clinical trial and prior to the commencement of the first Phase III clinical trial; $5,000,000 if exercised on or after the commencement of the first Phase III clinical trial and prior to the filing of a New Drug Application (“NDA”) with the FDA for the first licensed product; and $8,000,000 if exercised on or after the filing of an NDA for the first licensed product.
The Company has the right to terminate the agreement at any time by giving 90 days advance notice subject to the payment of any amounts due under the agreement at that time. If the Company does not terminate the agreement or exercise the buy-out option, the term of the agreement shall continue until the expiration of the Company’s obligation to make royalty payments. Such royalty payments continue for each product in each country until the later of the expiration of the related patent or 10 years after the initial sale of the product in the respective country. The agreement may also be terminated for cause by either party upon the breach of the material obligations of the other party or the bankruptcy or liquidation of the other party.
(c) Employment Agreements
The Company has agreements with its executive officers that provide for severance payments to the employee upon termination of the agreement by the Company for any reason other than for cause, death or disability or by the employee for good reason The maximum aggregate severance payments under the agreements were approximately $720,000 at December 31, 2020.
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(d) Litigation
The Company is subject, from time to time, 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. At December 31, 2020 and December 31, 2019, the Company did not have any pending legal actions.
(e) Risks and Uncertainties
In March 2020, the clinical trial sites participating in the Company's Phase 2a trial in AD patients in collaboration with the Alzheimer's Disease Cooperative Study temporarily suspended enrollment of new patients because of the ongoing COVID-19 pandemic. Prior to suspension of enrollment, 14 patients had been enrolled and completed treatment, out of a total trial size of 24 patients. The trial sites have reopened and patient recruitment and treatment have resumed. In addition, due to restrictions related to COVID-19 during 2020, the Company experienced delays in opening clinical trial sites for its Phase 2a clinical trial in AD and PD (the “AD/PD Trial”). In early 2021, all of the remaining sites which are participating in the AD/PD Trial opened for recruitment and treatment of patients. Although the Company currently believes its clinical trials will be completed on time, the extent to which the COVID-19 pandemic could have a material impact on the clinical trials is dependent on the spread of the disease and government and healthcare system responses to such spread, which are presently highly uncertain. Management continues to evaluate the potential impact. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
(9) Redeemable Convertible Preferred Stock and Stockholders’ Equity
(a) Overview
The Company closed its IPO on January 31, 2020, issuing 2,300,000 shares of common stock. In connection with the closing of the Company’s IPO, the then-outstanding 5,133,159 shares of Series A and 630,722 shares of Series A-1 redeemable convertible preferred stock converted into an aggregate of 4,117,089 shares of Company common stock. Each share of redeemable convertible preferred stock was converted into the number of shares of common stock determined by dividing the original issue price by the applicable conversion price. The Series A-1 conversion price was $1.26, and the Series A conversion price was $0.70, as adjusted for the reverse stock split discussed in Note 2.
The Company’s Amended and Restated Certificate of Incorporation was adopted on January 31, 2020 to authorize the issuance of two classes of stock to be designated, respectively, common stock and preferred stock. The total number of shares which the Company is authorized to issue is 37,000,000, each with a par value of $0.0001 per share. Of these shares, 35,000,000 shall be common stock and 2,000,000 shall be preferred stock.
(b) Common Stock
1. Dividends
Subject to the rights of holders of all classes of Company stock outstanding having rights that are senior to or equivalent to holders of common stock, the holders of the common stock are entitled to receive dividends when and as declared by the Board.
2. Liquidation
Subject to the rights of holders of all classes of stock outstanding having rights that are senior to or equivalent to holders of common stock as to liquidation, upon the liquidation, dissolution or winding up of the Company, the assets of the Company will be distributed to the holders of common stock.
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3. Voting
The holders of common stock are entitled to one vote for each share of common stock held. There is no cumulative voting.
(c) Preferred Stock
Preferred stock may be issued from time to time by the Board in one or more series.
(d) Warrants
In conjunction with the IPO, the Company granted the underwriters 100,000 warrants to purchase shares of Company common stock at an exercise price of $7.50 per share, which is 125% of the initial public offering price. The warrants have a five-year term and are not exercisable prior to January 29, 2021. All of the warrants were outstanding at December 31, 2020, and the Company accounts for the warrants as a component of stockholders’ equity.
(10) Share-Based Compensation
Effective upon the closing of the Company’s IPO on January 31, 2020, the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) became effective, succeeding the Company’s previous equity incentive plan. The previous plan had 352,282 options outstanding as of the effective date of the 2019 Plan. Under the 2019 Plan, 1,000,000 shares are authorized to be issued and no new options may be issued under the previous plan, although shares subject to grants which are cancelled or forfeited will again be available under the 2019 Plan. As of December 31, 2020, 168,664 shares were available for future grants.
The 2019 Plan provides for grants to employees, members of the Board, consultants and advisors to the Company, in the form of stock options, stock awards and other equity-based awards. The amount and terms of grants are determined by the Board. Stock options have a maximum term of 10 years after date of grant and are exercisable in cash or as otherwise determined by the Board.
As of December 31, 2020, and 2019, options to purchase common shares of the Company outstanding were as follows:
Weighted
Average
Remaining
Weighted Contractual
Number of Average Term
Shares Exercise Price (Years)
Granted — —
Exercised — —
As of December 31, 2020, the aggregate intrinsic value of options outstanding was $5,523,826 and options exercisable was $5,303,326.
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810,000 options were issued during the year ended December 31, 2020. Under the grant agreements, 50,000 of the options vest after one year and the remainder of the options were vested and exercisable upon grant. These options have a 10-year term. No options were issued during the year ended December 31, 2019. The weighted average grant date fair value of options issued during the year ended December 31, 2020 was $2.19. The fair value was estimated using the Black Sholes option pricing model using the following weighted average assumptions:
Year Ended
Risk-free interest rate 0.38 %
Expected life 5.00
Expected volatility 80 %
Expected dividend yield —
During the year ended December 31, 2020, the Company granted stock awards totaling 25,000 shares to consultants and advisors for services rendered which were vested upon grant. Based on the closing price of the Company’s common stock on the NYSE American on the date of grant, these awards had an aggregate fair value of $122,750, which was recognized in share-based compensation expense upon grant. No stock awards were issued during the year ended December 31, 2019. As of December 31, 2020, there was no unrecognized compensation expense related to stock awards.
Share-based compensation expense in the statements of operations, including the fair value of stock awards to consultants and advisors for services rendered, for the years ended December 31, 2020 and 2019 was $1,864,913 and $8,483, respectively, of which $138,704 and $0, respectively, was included in research and development and the remainder in general and administrative expense. As of December 31, 2020 there was $31,970 unrecognized compensation expense related to unvested options. That cost is expected to be recognized over a weighted-average period of 0.3 years.
(11) Net Loss Per Share
The Company has reported a net loss for the years ended December 31, 2020 and 2019, and the basic and diluted net loss per share attributable to common stockholders are the same for both years because all redeemable convertible preferred stock, convertible promissory notes and stock options have been excluded from the computation of diluted weighted-average shares outstanding because such securities would have an antidilutive impact.
The following table sets forth the computation of basic and diluted net loss per share:
Year Ended
December 31,
Numerator
Denominator
Net loss per share, basic and diluted $ (0.87) $ (3.51)
Potential common shares issuable upon conversion of preferred stock and exercise of stock options that are excluded from the computation of diluted weighted-average shares outstanding are as follows:
December 31,
Redeemable convertible preferred stock, as converted — 4,117,089
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(12) Income Taxes
The federal and state provision (benefit) for income taxes was $0 for the years ended December 31, 2020 and 2019.
A reconciliation of income tax benefit computed at the statutory federal income tax rate to income taxes as reflected in the financial statements for the years ended December 31, 2020 and 2019 is as follows:
Year Ended
December 31,
Federal income tax benefit at statutory rate 21.0 % 21.0 %
State and local tax, net of federal benefit 7.6 % 8.0 %
Permanent differences (0.8) % 0.4 %
Research and development credit 1.9 % — %
Change in valuation allowance (29.7) % (29.4) %
Effective income tax rate 0.0 % 0.0 %
Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets are comprised of the following:
As of December 31,
Convertible debt — 24,049
Research and development tax credit carryforwards 241,414 137,826
Net deferred taxes $ — $ —
As of December 31, 2020, the Company had U.S. federal net operating loss (“NOL”) carryforwards of $7,821,413, which may be available to offset future income tax liabilities. Federal NOL carryforwards generated in 2017 and prior of $2,764,240 will expire beginning in 2032. The remaining federal NOL carryforwards generated in 2018 and later do not expire. As of December 31, 2020, the Company also had U.S. state NOL carryforwards of $10,368,296 which may be available to offset future income tax liabilities and will expire beginning in 2028.
The Company has recorded a full valuation allowance against its net deferred tax assets as of December 31, 2020 and 2019 because the Company has determined that is it more likely than not that these assets will not be fully realized due to historic net operating losses incurred. The Company experienced a net change in valuation allowance of $1,619,516 and $291,575 in the years ended December 31, 2020 and 2019, respectively.
As of December 31, 2020, the Company had federal research and development tax credit carryforwards of $241,414 available to reduce future tax liabilities which expire beginning in 2028.
Under the provisions of the Internal Revenue Code, the NOL and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. The Company has completed financings since its inception, including its IPO which closed on
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January 31, 2020, which may have resulted in a change in control as defined by Sections 382 and 383 of the Internal Revenue Code, or could result in a change in control in the future.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. The Company’s tax years from 2017 to the present remain open for review. All open years may be examined to the extent that tax credits or NOL carryforwards are used in future periods. The Company will recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2020, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts have been recognized in the Company’s statements of operations.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. Previously, NOLs generated after December 31, 2017 were limited to 80% of taxable income in future years. In addition, the CARES Act allows NOLs incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The NOL carryback provision of the CARES Act had no impact on the Company due to its tax losses generated during all prior years.
(13) Related-Party Transactions
As discussed in Note 7, in March 2019 the Company issued Notes in the aggregate principal amount of $530,000. Three of the Company’s directors purchased an aggregate of $305,000 of the Notes. On January 31, 2020, the Company closed its IPO and the outstanding Notes plus accrued interest held by directors converted into 71,429 shares of Company common stock.
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SIGNATURES
In accordance with the requirements Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ANNOVIS BIO, INC.
By: /s/ MARIA MACCECCHINI
Name: Maria Maccecchini
Title: President and Chief Executive Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Each of the undersigned hereby constitute and appoint Maria Maccecchini and Jeffrey McGroarty, and each of them, his or her true and lawful attorneys-in-fact and agents, with full and several power of substitution and resubstitution, for him or her and in his or her name, place and stead in any and all capacities, to sign one or more amendments to this Annual Report on Form 10-K, each in such form as they or any one of them may approve, and to file the same with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done so that this Annual Report and any amendments shall comply with the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations adopted or issued pursuant thereto, as fully and to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitute or resubstitute, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
/s/ MARIA MACCECCHINI President and Chief Executive Officer March 3, 2021
Maria Maccecchini (principal executive officer)
/s/ JEFFREY MCGROARTY Chief Financial Officer (principal March 3, 2021
Jeffrey McGroarty financial and accounting officer)
/s/ MICHAEL HOFFMAN Chairman of the Board and Director March 3, 2021
Michael Hoffman
/s/ CLAUDINE BRUCK Director March 3, 2021
Claudine Bruck
/s/ ROBERT WHELAN Director March 3, 2021
Robert Whelan
/s/ MARK WHITE Director March 3, 2021
Mark White
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