AZTR US Equity☆

Item 1A. Risk Factors 38

Item 1B. Unresolved Staff Comments 62

Item 1C. Cybersecurity 62

Item 2. Properties 63

Item 3. Legal Proceedings 63

Item 4. Mine Safety Disclosures 63

Item 6. Reserved 65

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 75

Item 8. Financial Statements and Supplementary Data 76

Item 9A. Controls and Procedures 77

Item 9B. Other Information 77

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 77

PART III 78

Item 10. Directors, Executive Officers and Corporate Governance 78

Item 11. Executive Compensation 78

Item 14. Principal Accountant Fees and Services 78

Item 15. Exhibits and Financial Statement Schedules 78

Signatures 80

i

CAUTIONARY

NOTICE

This

annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,

and Section 21E of the Securities Exchange Act of 1934, as amended. Those forward-looking statements include our expectations, beliefs,

intentions and strategies regarding the future.

These

and other factors that may affect our financial results are discussed more fully in “Risk Factors” and “Management’s

Discussion and Analysis of Financial Condition and Results of Operations” included in this report. Moreover, we operate in a very

competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks,

nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual

results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties

and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ

materially and adversely from those anticipated or implied in our forward-looking statements. Although we believe that the expectations

reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance

or events and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other

person assumes responsibility for the accuracy and completeness of the forward-looking statements. We caution readers not to place undue

reliance on any forward-looking statements. We do not undertake, and specifically disclaim any obligation, to update or revise such statements

to reflect new circumstances or unanticipated events as they occur, and we urge readers to review and consider disclosures we make in

this and other reports that discuss factors germane to our business. See in particular our reports on Forms 10-K, 10-Q, and 8-K subsequently

filed from time to time with the Securities and Exchange Commission.

Except

as otherwise indicated, all share and share price in this report gives effect to a forward stock split effected on May 17, 2023 at a

ratio of one for 7.1 for one.

INDUSTRY

AND MARKET DATA

This

report, particularly the section “Business,” contains observations, statistical data, estimates, and forecasts that are based

on independent industry, government and non-government organization publications or other publicly available information, as well as

other information based on our internal sources. Although we believe that the third-party sources referred to in this report are reliable,

estimates as they relate to projections involve numerous assumptions, are subject to risks and uncertainties, and are subject to change

based on various factors, including those discussed under the section titled “Risk Factors” and elsewhere in this

report. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent

parties and by us.

Certain

information in the text of this report is contained in independent industry government and non-governmental organizational publications.

The sources of these publications are provided below:

● Orphanet, Netherton Syndrome, Orphanet: Netherton syndrome

ii

RISK

FACTOR SUMMARY

Our

business is subject to numerous risks and uncertainties, including those described in “Risk Factors” in this Annual Report

on Form 10-K. These risks include, but are not limited to the following:

● We currently have no sales and marketing organization;

● Our business may suffer with the loss of key personnel;

● An active, liquid and orderly trading market for our shares may not develop;

● The market price of our shares may be subject to fluctuation and volatility;

iii

PART

I

Item

1. Business

Background

Azitra,

Inc. was formed as a Delaware corporation on January 2, 2014 for the purpose of developing innovative therapies for precision dermatology

using engineered proteins and topical live biotherapeutic products. Since our formation, we have built a proprietary platform that includes

a microbial library comprised of approximately 1,500 unique bacterial strains that can be screened for unique therapeutic characteristics.

The platform is augmented by an artificial intelligence and machine learning technology that analyzes, predicts and helps screen our

library of strains for drug like molecules. The platform also utilizes a licensed genetic engineering technology, which can enable the

transformation of previously genetically intractable strains. We have not commenced commercial operations. Unless otherwise indicated,

the terms “Azitra,” Company,” “we,” “us,” and “our” refer to Azitra, Inc. and its

wholly-owned subsidiaries.

Overview

We

are an early-stage clinical biopharmaceutical company focused on developing innovative therapies for precision dermatology using engineered

proteins and topical live biotherapeutic products. We have built a proprietary platform that includes a microbial library comprised of

approximately 1,500 unique bacterial strains that can be screened for unique therapeutic characteristics. The platform is augmented by

an artificial intelligence and machine learning technology that analyzes, predicts and helps screen our library of strains for drug like

molecules. The platform also utilizes a licensed genetic engineering technology, which can enable the transformation of previously genetically

intractable strains. Our initial focus is on the development of genetically engineered strains of Staphylococcus epidermidis, or

S. epidermidis, which we consider to be an optimal therapeutic candidate species for engineering of dermatologic therapies. The

particular species demonstrates a number of well-described properties in the skin. As of the date of this report, we have identified,

among our microbial library, over 60 distinct bacterial species that we believe are capable of being engineered to create living organisms

or engineered proteins with significant therapeutic effect.

We

are a pioneer in genetically engineering bacteria for therapeutic use in dermatology. Our goal is to leverage our platforms and internal

microbial library bacterial strains to create new therapeutics that are either engineered living organisms or engineered proteins or

peptides to treat skin diseases. Our initial focus is on the development of our current product candidates, including:

We

also have established partnerships with teams from Carnegie Mellon University and the Fred Hutchinson Cancer Center, or Fred Hutch, two

of the premier academic centers in the United States. Our collaboration with the Carnegie Mellon based team takes advantage of the power

of whole genome sequencing. This partnership is mining our proprietary library of bacterial strains for novel, drug like peptides and

proteins. The artificial intelligence/machine learning technology developed by this team predicts the molecules made by microbes from

their genetic sequences. The system then compares the predictions to the products actually made through tandem mass spectroscopy and/or

nuclear magnetic resonance imaging to refine future predictions. The predictions can be compared to publicly available 2D and 3D protein

databases to select drug like structures.

We

hold an exclusive, worldwide license from Fred Hutch regarding the use of its patented SyMPL technologies for all fields of genetic engineering,

including to discover, develop and commercialize engineered microbial therapies and microbial-derived peptides and proteins for skin

diseases. We are utilizing our licensed patent rights to build plasmids that in order to make genetic transformations that have never

been previously achieved. Our collaboration with Fred Hutch is led by Dr. Christopher Johnston, an expert in microbial engineering, and

the innovator behind the SyMPL technology.

Beyond

our three lead product candidates and collaboration with Bayer, our goal is to develop a broad portfolio of product candidates focused

on expanding the application of our platforms for precision dermatology. We believe that we have established a unique position in advancing

the development of biologics for precision dermatology.

Our

Business Strategies

We

intend to create a broad portfolio of product candidates for precision dermatology through our development of genetically engineered

proteins selected from our proprietary microbial library of approximately 1,500 unique bacterial strains. Our strategy is as follows:

Our

Microbial Library and Microbial Drug Delivery Platform

Commensal

microorganisms reside on either the surface of the body or in the mucosa without harming human health. They act on the host’s immune

system to induce protective responses that prevent colonization and invasion by infectious pathogens, and thereby play a crucial role

in maintaining human health across a number of organ systems, particularly in the skin. Diverse communities of microorganisms populate

the skin, and a square centimeter can contain up to a billion microorganisms. These diverse communities of bacteria, fungi, mites and

viruses can provide protection against disease and form dynamic, yet distinct niches on the skin. Together, they make up the skin microbiome.

Many

genetically driven human diseases are systemically or partially related to the dysfunction of specific proteins that are missing or functionally

inert due to a mutation. Since approximately 1982, the biopharmaceutical industry has been genetically engineering recombinant proteins

in bacterial microorganisms for purposes providing therapies that mimic or support the body’s normally functioning proteins and

peptides. For decades, the vast majority of genetic engineering has been limited to primary E. coli and a handful of other bacterial

species, many of which can become pathogenic, inducing infection. In contrast, we have chosen to focus on S. epidermidis because

of its beneficial effects as a commensal, naturally occurring microbe on the skin. Our goal is to leverage our platform and internal

microbial library of over 60 bacterial species to engineer and deliver commensal skin bacteria directly to the target through the stratum

corneum of the skin. At these deeper levels in the skin, engineered microbes can produce the missing or inert proteins and thereby resolve

the underlying disease cause.

S.

epidermidis and Our Proprietary Microbial Library

S.

epidermidis is a strong therapeutic candidate species due to a number of well-described properties in the skin. S. epidermidis

is a gram-positive bacterium that is ubiquitous in the human skin and mucosal flora. As one of the earliest colonizers of the skin,

S. epidermidis plays an important role in cutaneous immunity and maintaining microbial community homeostasis. S. epidermidis

is known to have a beneficial relationship with its host as a skin commensal. The species has shown inhibition of the pathogenic

strain, Staphylococcus aureus, or S. aureus, as well as the strain Propionibacterium acnes, or P. acnes. S. epidermidis

induces keratinocytes to produce antimicrobial peptides and produces non-inflammatory T cell accumulation of both CD4+ and CD8+ T

cells via immune cell signaling. The T cell responses induce re-epithelization of the skin after injury, accelerating repair and wound

closure. For these reasons, we believe S. epidermidis offers several advantages as a vector for topical delivery of therapeutic

proteins.

In

their 2019 study, Stacy and Belkaid, world-leading experts in the skin microbiome, described S. epidermidis as “a ‘poster

child’ of the skin microbiota to illustrate the remarkable diversity of functions a microbe can exert on skin physiology and health.”

We believe that S. epidermidis has enormous strain diversity that can be exploited for therapeutic purposes. In the 2020 Oh Study,

Julia Oh’s lab reported that 1,482 unique strains of S. epidermidis were present on only five individuals. These strains

had not only significant genetic diversity but also large phenotypic diversity. We believe this large inter-strain variation among S.

epidermidis can be exploited. To that end, we collected samples from healthy volunteers to develop and characterize our own strain

library of S. epidermidis that includes over 900 unique S. epidermidis strains with potential for therapeutic use. We have

used this microbial library to screen against selected properties, including antimicrobial peptide secretion, S. aureus killing,

antibiotic sensitivity, and other therapeutically relevant characteristics. We have also collected other species in our library that

includes roughly 60 different skin commensal species that can also be screened for therapeutic purposes.

Figure

1. Representative Species in Azitra Microbial Library

Predictive

Analysis of Our Microbial Library

The

biopharmaceutical industry has seen success in identifying and isolating thousands of bacterial species. Yet only a relatively few such

species, believed to be less than 20, have been engineered to produce proteins or peptides with therapeutic potential. We have partnered

with Chemia Biosciences, Inc., a research and development group from Carnegie Mellon University. Through our collaboration with Chemia

Biosciences, we are able to use their proprietary genomic and peptidomic artificial intelligence and machine learning system, NRPMiner,

to develop and confirm natural product predictions of the proteins, peptides and small molecules that are generated by our proprietary

bacterial library. These predictions are confirmed via tandem mass spectroscopy or nuclear magnetic resonance. The information is then

fed back into the machine learning algorithm to refine the predictions. It can also be compared to existing 2D and 3D protein databases

to look for structural homology of our products to existing protein and peptide drugs. We believe our collaboration with the Carnegie

Mellon based team provides us with a scalable and modification tolerant way to accelerate therapeutic discoveries within our microbial

library.

The

Delivery of our Microbially Produced Drugs

The

delivery of genetically engineered proteins to the subcutaneous target sites is hindered by the natural barrier and the defenses of the

stratum corneum. This is the skin’s outermost layer, which acts as a barrier that prevents unwanted materials from entering the

body. To address this challenge, we have developed a proprietary process capable of facilitating protein delivery in a manner that bypasses

the normally impenetrable stratum corneum. The strategy utilizes the ability of particular microbes to infiltrate into the deeper layers

of the skin. There, the genetically modified microbes act as miniature factories to produce a therapeutic protein or molecule where it

is needed.

Our

protein delivery capability for treating skin conditions is based on engineering S. epidermidis and other microbes to secrete

proteins for drug delivery into the skin. We believe any number of proteins can be engineered and encoded by our bacteria to be produced

and delivered to the skin to treat a variety of skin conditions. We have also added key proprietary features in its platform to facilitate

protein delivery. A key feature of this system is that it bypasses the normally impenetrable skin barrier, a problem of topical protein

delivery. The skin barrier, composed of the stratum corneum, is sealed by enucleated keratinocytes and formed by numerous structural,

physical, and biochemical properties. Other transdermal delivery challenges arise due to susceptibility of protein to enzymatic digestion

by proteases and solubility and diffusion impediments due the hydrophobic surface and the layers of linked corneocytes comprising the

stratum corneum. We address this issue by leveraging the natural homing of S. epidermidis to layers below the stratum corneum.

In preclinical studies, we have shown that S. epidermidis homes to layers below the stratum corneum and delivers proteins into

the deeper epidermis.

To

expand upon our recombinant protein construction capabilities, we have acquired an exclusive license to proprietary technology that disguises

our genetically engineered DNA sequences to enable the production of proteins in previously intractable bacterial species. The technology

from the Fred Hutchinson Cancer Center or Fred Hutch, expands the universe of bacterial species that can be genetically modified. It

is based upon a restriction modification system-silent SyMPL toolset. The SyMPL technology platform makes human-made DNA invisible to

the bacteria’s defenses. In theory, the method can be applied to any type of bacteria. Our current product candidates do not incorporate

the SyMPL technology platform, but we expect that some or all of our future product candidates will do so.

Virtually

all strains of naturally occurring bacteria have defense mechanisms called restriction modification systems. The four types of restriction

modification systems recognize and defend against insertion of foreign DNA used to code recombinant proteins. Functional genetic engineering

of S. epidermidis (as well as S. aureus) has previously been limited due to the presence of Type I and IV restriction systems

in virtually all strains of these bacterial species. These restriction systems recognize methylated cytosine bases in DNA from standard

clone expansion systems (such as E. coli) and hinder incorporation of foreign DNA in the microbe. S. epidermidis was once

believed to be an “untransformable” strain due to its genetic intractability. However, we have been able to overcome S.

epidermidis’ defenses.

Current

genetic engineering processes add specific modifications to disguise human made DNA to trick the bacterium into thinking the intruder

is a part of its own DNA. This approach often takes considerable time and resources to try to match the right disguise to each particular

recognition motif. In contrast, Fred Hutch’s SyMPL technology platform is a systematic “stealth-by-engineering” approach

to overcome restriction modification defense systems. These restriction modification defense systems protect microbes from foreign DNA

and hinder the vast majority of genetic engineering approaches. The SyMPL technology platform is based on the ability to build minicircle

DNA plasmids which lack any of the target recognition motifs for the microbe’s defense systems to identify. The technology uses

the genome and methylome from a target bacteria’s genomic sequence to identify the restriction modification target motifs. They

are then eliminated from the nucleotide sequence of the genetic tool in silico. The resulting sequence is used to build the restriction

modification, SyMPL tools. These are propagated and then used for genetic transformations. Not only does the “stealth by engineering”

approach enable transformations in genetically intractable bacterial strains, but it has also been shown to drastically increase transformational

efficiency. Proof of principle experiments have shown improvements of over 10,000x in yields of genetically engineered colonies.

In

January 2022, Fred Hutch granted us an exclusive worldwide, royalty bearing license to the patent rights, and a non-exclusive worldwide,

royalty bearing license to the related know-how, for the SyMPL technology platform in all fields of use. For more information related

to the intellectual property acquired pursuant to the Fred Hutch license agreement, see the section titled “Business-Licenses

and Intellectual Property Rights.”

Our

Product Candidates

ATR-12

for the treatment of Netherton syndrome

ATR-12

is our proprietary and patent-pending drug candidate that contains a novel strain of S. epidermidis which has been genetically

modified to express and secrete an active fragment of the full-length protein called the lympho-epithelial Kazal-type related inhibitor,

or LEKTI. It has also been engineered to be auxotrophic, meaning that it requires the D-alanine nutrient in its formulation to survive

and propagate. This provides an additional level of safety against potential systemic infection. ATR-12 is a topical application intended

to address the underlying cause of Netherton syndrome, by replacing deficient LEKTI with an active segment of human recombinant LEKTI,

or rhLEKTI-D6, to counter the dysregulated skin serine protease activity observed in Netherton syndrome patients. The uncontrolled serine

protease activity leads to a profound skin barrier defect and the release of pro-inflammatory and pro-allergic mediators by keratinocytes

and immune cells. As of the date of this report, there is no known therapy for the cure or effective treatment of Netherton syndrome.

We believe ATR-12 has the potential to be the first therapy to effectively treat this disease of the skin. Based on the Barbati and Sun

Studies, we believe that ATR-12 represents a potential $250 million global sales opportunity by mid-2030.

Netherton

syndrome overview

Netherton

syndrome is a rare, autosomal recessive disease estimated to affect approximately one in every 200,000, but its prevalence may be underestimated

due to misdiagnosis. It is a chronic disease of the skin, characterized by severe inflammation, pruritus, scaling, red, and dehydrated

skin. Infants born with Netherton syndrome may suffer from a failure to thrive, and it has been reported that approximately one in ten

infants with Netherton syndrome die in their first year of life. Those that survive face a lifetime of skin disease challenges including

red, scaly skin, hair defects and an ongoing higher than normal risk for infection and allergy.

Netherton

syndrome is caused by mutations in the SPINK5 gene, which codes for the serine protease inhibitor Lympho-epithelial Kazal-type

related inhibitor, or LEKTI. The function of LEKTI is to inhibit enzymes in the epidermis, such as kallikreins 5, 7 and 14, or KLK5,

KLK7 and KLK14, which facilitate the shedding of skin cells in a process known as desquamation. When LEKTI is absent or has reduced activity,

excess shedding results and the skin is sensitive, open, and appears red and scaly. This is accompanied by the detachment of the stratum

corneum, leading to severe barrier dysfunction, dehydration and potential exposure to environmental agents, such as chemicals. Histopathology

and immunofluorescence staining of skin from a Netherton syndrome patient compared to healthy volunteer reveal an absence of LEKTI and

abnormalities in the skin such hyperkeratosis, epidermal thickening, and reduction of the basophilic keratohyalin granules.

Figure

2: Netherton syndrome pathophysiology and LETKI deficiency

Netherton

syndrome can range in severity from mild, such as red patchy areas of the skin, to life threatening. The degree of severity of the disease

correlates directly with the extent of loss of function of LEKTI on the skin. Netherton syndrome appears shortly after birth and is most

severe in the first year of an infant’s life. Survival beyond the first year is common in most cases, but the implications of the

disease are a lifelong challenge.

As

of the date of this report, there is no known cure for Netherton syndrome and treatment options are limited. Dermatologic interventions

to treat the severe skin manifestations of Netherton syndrome include moisturizers, topical corticosteroids, and calcineurin inhibitors,

all of which are limited in that they do not provide sustained remediation. Given the severity of disease during neonatal stages, fluid/electrolyte

and diet support are needed in addition to treating infections that often arise in these patients. While immunoglobulin therapy to address

immunodeficiencies associated with Netherton syndrome has shown limited success, a sustained remediation of skin barrier defects, induced

by dysregulation of LEKTI, is currently unavailable.

Our

solution – ATR-12 for the treatment of Netherton syndrome

ATR-12

is a topical ointment containing an S. epidermidis strain, SE351, that has been genetically modified to express LEKTI from the

chromosome. The SE351 strain has also been engineered to be auxotrophic for D-alanine, which means it cannot survive without the exogenous

D-alanine nutrient provided in the formulation. ATR-12 is intended to address the underlying cause of Netherton syndrome by replacing

deficient/dysfunctional LEKTI with an active, recombinant, human fragment of the full-length protein, rhLEKTI-D6. The treatment consists

of applying ATR-12 to affected areas. rhLEKTI-D6 produced by SE351 will counter the dysregulated skin serine protease activity observed

in Netherton syndrome patients, to restore skin barrier function and reduce inflammation. We believe that among the important advantages

of this approach is the potential to deliver rhLEKTI-D6 over time into the lower layers of the stratum corneum and epidermis, the primary

sites of dysregulation in patients with Netherton syndrome.

The

S. epidermidis strain selected to deliver rhLEKTI-D6 to the skin, SE351, was selected from our proprietary strain collection.

This strain is characterized by low virulence and is a non-biofilm forming host strain. To further enhance the safety of ATR-12, we have

engineered the microbe for D-alanine to be auxotrophic. The key advantage to engineering auxotrophy is the ability to control growth

and halt potential infection. Full length human LETKI, a 15-domain protein (145 kDa), is too large for reliable bacterial expression

and secretion. Given evidence that fragments of the full-length protein are sufficient to counter the dysregulated skin serine protease

activity observed in Netherton syndrome patients, we selected D6 for recombinant expression in S. epidermidis.

In

May 2020, we received Rare Pediatric Disease Designation from the FDA for ATR-12. As a result, if we are able to obtain approval for

ATR-12 from the FDA in pediatrics, we will be eligible to receive a Priority Review Voucher, which can be used by us to obtain FDA review

of a New Drug Application or Biologics License Application for this or another drug candidate in an expedited period of six months. These

vouchers are often transferable, and some have been sold for over $100 million.

Preclinical

data for ATR-12

As

of the date of this report, we have conducted several in vivo and ex vivo experiments that collectively support the potential

efficacy of ATR-12 as a disease modifying therapy for patients with Netherton syndrome. The genetically engineered strain of S. epidermidis

used in the formulated ATR-12 drug product is called SE351. In 2021, we conducted in vitro studies to assess the ability of exogenously

applied SE351 to colonize sterile reconstructed human epidermis. SE351 successfully colonized the reconstructed human epidermis and,

furthermore, no S. epidermidis colonization occurred without D-alanine present, confirming that D-alanine must be supplied for

SE351 growth on skin. These data suggest that SE351 is capable of colonizing human skin, and that colonization can be controlled with

D-alanine supplementation.

Additionally,

in vitro studies using tape stripped skin from healthy volunteers spiked with KLK5 to mimic Netherton syndrome showed that diluted

SE351 culture supernatant dose-dependently inhibited trypsin-like activity (KLK5 activity). Trypsin-like activity in the Netherton syndrome

surrogates returned to normal healthy levels when a solution containing ≥0.5% of the SE351 culture supernatant was added.

Figure

3: In Vitro Netherton Syndrome Model Using Human Skin Tape Strip Extracts Supplemented with Disease Level KLK5 Activity

In

addition, results from an ex vivo pig skin model demonstrate that a single topical dose of ATR-12 at 3 dose levels led to secretion

of active rhLEKTI-D6. Finally, data from an ex vivo healthy human skin model demonstrate that a single topical dose of ATR-12

administered at the maximum intended dose of 109 CFU/g delivers enough active rhLEKTI-D6 into the lower layers of the stratum

corneum to effectively inhibit the protease, kallikrein 5 (“KLK5”), at levels typically observed in patients with Netherton

syndrome.

In

particular, data from an ex vivo healthy human skin model demonstrate that a single topical dose of ATR-12 administered at the

maximum intended dose of 109 Colony Forming Units per gram (CFU/g) delivers enough active rhLEKTI-D6 into the lower layers

of the stratum corneum to effectively inhibit KLK5 at levels typically observed in patients with Netherton syndrome. Amounts of LEKTI

activity in layers extracted were from tape strip samples from ex vivo human skin treated with placebo and ATR-12. The collection

proceeded right after skin application (T = 0 hours, white bars) or after 8 hours incubation at 30°C (T = 8 hours, black bars). Total

LEKTI activity levels were obtained by adding the pmol amounts through layers 1 to 30 of placebo (grey bars) or ATR-12 (black bars) samples.

Data are the average ± a standard deviation (SD) of 3 independent samples (N = 3). Statistical analysis was carried out using

two-way ANOVA, and ** represents p <0.01.

Figure

4: LETKI activity in Placebo and ATR-12-Treated Skin Samples Following 0- and 8-hour Incubation

In

addition, a single therapeutic dose of ATR-12 over 24-hour incubation yielded ~2-fold higher LEKTI activity compared to 8-hour incubation.

This indicates continuous production of functional rhLEKTI-D6 by ATR-12 over time.

Figure

5: LETKI activity in Placebo and ATR-12-Treated Skin Samples Following 24-hour Incubation

In

vitro stoichiometry work performed by Azitra indicates that KLK5 requires 2 molar equivalents on the rhLEKTI-D6 protein for inhibition

(as measured by IC50). Historical studies have indicated that Netherton syndrome patients to show up to ~6 fold the amount

of KLK5 that the amounts found in normal skin. This equates to 60 pmol of KLK5 per given area. The studies shown above indicate that

SE351 delivered 350 pmol of rhLEKTI-D6 at 8 hours and it delivered 700 pmol of rhLEKTI-D6 at 24 hours. This represents a 5- to 11-fold

amount above the predicted amount required for activity.

Figure

6: In vitro stoichiometry of LEKTI-D6 to inhibit KLK5

In

2022, we obtained pre-IND correspondence with the FDA for purposes of discussing our proposed regulatory pathway for ATR-12 and obtaining

guidance from the FDA on the preclinical plan leading to the filing and acceptance of an IND application for ATR-12. In December 2022,

we filed an IND for a first-in-human trial of ATR-12 in Netherton syndrome patients. Our IND proposes a Phase 1b multi-center, randomized,

double-blind, single dose level, placebo-controlled clinical study of ATR-12 in patients with Netherton syndrome. The primary endpoint

is safety and secondary endpoints will include signals of efficacy and pharmacokinetics. Exploratory endpoints include immune and inflammatory

mechanism biomarkers. On January 27, 2023, we received notification from the FDA that the “study may proceed” with respect

to the proposed Phase 1b clinical trial with initial safety results expected in the second half of 2024.

ATR-04

for the Treatment of EGFRi-Associated Rash

ATR-04

is our proprietary and patent-pending drug candidate that contains a novel strain of S. epidermidis, SE484, which has been genetically

modified to be auxotrophic tor D-alanine. ATR-04 is a topical application intended to address the papulopustular rash experienced by

cancer patients undergoing epidermal growth factor receptor inhibitor, or EGFRi, targeted therapy. We believe this product candidate

represents a potential $1 billion global sales opportunity by 2030.

EGFRi-Associated

Rash Overview

Targeted

cancer therapies have produced significant treatment advances for patients diagnosed with a variety of tumor types, but they are also

associated with unique dermatologic toxicities that may hamper treatment efforts and cause significant physical and psychological discomfort

for patients. Prevention and management of these toxicities may allow patients to tolerate treatments better, remain on therapy longer

and thereby potentially receive maximum clinical benefit from the drug. One such class of targeted cancer therapy includes EGFR inhibitors.

EGFR is a protein on the surface of cells that helps them grow and divide. It is also a key factor in certain malignancies, and its activity

enhances tumor growth, invasion, and metastasis. While systemic exposure to EGFRi agents suppresses EGFR at the target cancer site, it

also suppresses EGFR throughout the body. In the skin, EGFR regulates multiple keratinocyte functions including proliferation, adhesion

and migration, survival, and differentiation. Consequently, inhibition of EGFR in the skin results in adverse skin reactions, which make

it difficult for patients to stay on these effective therapies.

Dermatologic

toxicities are amongst the most prevalent side effects seen with EGFRi-targeted therapies. The papulopustular rash is the earliest and

most common dermatologic adverse event of EGFRi treatment, often occurring in 50-80% of patients, depending on the drug, the cancer being

treated, and the treatment regimen. The appearance of the papulopustular rash is a dose-dependent skin drug reaction, which usually develops

in the first one to two weeks and peaks at three to four weeks on therapy. The intensity of the rash may start to decrease after two

weeks but can persists over the entire course of EGFRi treatment. The rash is characterized clinically as tender erythematous papules,

which after a few days evolve into pustules and then into crusts on the face, scalp, chest, and upper back. The rash is often accompanied

by severe xerosis and at times serious cutaneous bacterial infection, primarily S. aureus. While most skin rash episodes are considered

mild to moderate, some are severe. In many cases the rash leads to severe quality of life issues and can even lead to the interruption

or cessation of the EGFRi treatment.

The

current standard of care for rash treatment in patients undergoing EGFRi treatment varies depending on the rash severity. Typically,

skin moisturizers, topical steroids and doxycycline are administered prophylactically from the start of EGFRi therapy and are continued

throughout the entire treatment period. If the rash continues to advance, oral steroids and/or antibiotics are administered. However,

there are known systemic adverse events associated with these adjunctive therapies, and we believe that physicians and patients try to

limit their use. In addition, research indicates that oral antibiotics lead to a disruption in the gut microbiome, which in turn leads

to a decrease in the effectiveness of targeted therapies, including EGFRi. Given the high incidence rate of rash that continues with

these patients, as well as the concerns related to potential impacts of antibiotics on these therapies, we believe there is a clear unmet

medical need for additional safe and effective adjunctive therapies for addressing papulopustular skin rash.

Based

on studies conducted by Satoh and Lichtenberger, the cytokine, Interleukin-36 gamma, or IL-36γ, and S. aureus are linked

to and play a significant role in the rashes experienced by patients treated with EGFRis. IL-36γ, is elevated in the skin of patients

undergoing EGFRi therapy. In 2020, Satoh used gene expression profiling to identify IL-36γ as a candidate driver of EGFRi/MEKi

skin toxicity. It is induced by EGFR inhibition and Cutibacterium acnes that synergistically induce IL-36γ in the skin and

subsequently IL-8 and NF-κB, which leads to cutaneous neutrophilia. IL-36γ could be a key therapeutic target in treating

EGFRi-induced rashes. In 2013, Lichtenberger noted high rates (70%) of bacterial infection in patients (n=107) on EGFRi and proposed

a mechanism of EGFR ablation leading to S. aureus-induced infection in mice. The study noted a majority of the patients were positive

with S. aureus (54%). Mechanistically, the authors noted that EGFRi therapy impairs host defense: impaired expression of antimicrobial

peptides, especially against S. aureus; and lowered expression of tight junctions. Also, the study revealed EGFR ablation leads

to skin barrier defects as well as impaired cutaneous immune response and cytokine expression.

Our

solution – ATR-04 for the treatment of EGFRi-associated rash

ATR-04

is our formulated, drug product candidate for the treatment of EGFRi associated rash. It includes a novel auxotrophic strain of S.

epidermidis strain that was selected from our microbial strain library, based on desired properties of IL-36γ reduction and

inhibition of S. aureus and its biofilms. The current lead strain is called SE484. We then genetically engineered SE484 to be

auxotrophic tor D-alanine and to create our drug product candidate, ATR-04.

SE484

was chosen from our microbial library based on key characteristics such as inhibition of IL-36γ as well as its effect against S.

aureus. Together, we expect these mechanisms of action to lead to significant reductions in rash severity among patients undergoing

EGFRi therapy.

We

believe that ATR-04 has the potential to address current limitations to treatment of EGFRi-associated rash:

Preclinical

data of ATR-04

We

screened over 100 strains based on safety (e.g., lack of antibiotic resistance) and biological activity (e.g., IL-36γ inhibition

and activity versus S. aureus) and designated SE484 as our lead candidate strain. After engineering this strain to be auxotrophic

for D-alanine, we nominated this candidate for use as the active microbe in the ATR-04 drug product formulation.

EGFRi-associated

rash is a condition that is characterized by redness, itchiness, and irritation of the skin, and is induced by certain cancer treatments.

It was shown, by gene expression profiling (Satoh et al 2020), that skin biopsy samples from patients suffering from EGFRi-associated

rash had elevated levels of cytokines IL-36γ (IL-36 gamma) and IL-8 compared to skin from healthy donors. These are proinflammatory

cytokines that are signaling molecules of the immune system that increase the intensity of an immune response and can cause tissue damage.

In addition to elevated cytokine levels, EGFRi-treated patients have impaired skin barrier function. Infection with pathogenic strains

of S. aureus exacerbates the EGFRi-induced cutaneous disease.

Our

work was focused on identifying a Staphylococcus epidermidis strain, a skin commensal, that reduces IL-36γ levels and thus

reduces the rash associated with EGFRi. We reasoned that many species of bacteria that live on human skin probably survive there because

they have evolved ways to reduce the human immune system’s response to their presence, and we might be able to identify a resident

human skin commensal bacteria that survives thereby specifically reducing IL-36γ activity.

To

identify such a Staphylococcus epidermidis strain, we developed an in vitro assay to measure the levels of IL-36γ

and IL-8 that are produced by human skin cells that are grown in culture. The cell line we used is called HaCaT and is derived from human

keratinocytes, which are a cell type in the epidermis. In order to simulate the inflammatory phenotype of EGFRi-related disease of the

skin, HaCaT cells were stimulated with an immunostimulant, polyinosinic:polycytidylic acid, or poly I:C, which causes them to secrete

elevated levels of IL-36γ and IL-8. This assay was used to identify and evaluate the ability of different S. epidermidis

strains to lower IL-36γ and IL-8 levels.

We

screened over 100 strains based on safety (e.g., lack of antibiotic resistance) and biological activity (IL-36γ inhibition and

activity against S. aureus) and designated SE484 as our lead candidate strain. After engineering this strain to be auxotrophic

for D-alanine, so that it will grow only if provided with D-alanine, we also eliminated an anti-biotic resistance gene. Then, we nominated

this candidate for use as the active microbe in the ATR-04 drug product formulation.

To

test the ability of SE484 to reduce IL-36γ on a skin-like model, erlotinib was used to induce IL-36γ secretion on reconstructed

human epidermis, or RHE. Simultaneous application of SE484 with erlotinib reduced IL-36γ to a level comparable RHE that had not

been treated with erlotinib, showing that SE484 acts on a skin-like model to reduce this pro-inflammatory cytokine. Figure 7 shows the

results of two experiments to measure IL-36γ reduction by SE484. In Figure 7A, a cell-free supernatant (CFS) from a culture of

SE484 was applied to RHE, while in Figure 7B live cells of SE484 (either 1x108 CFU or 1x109 CFU) were applied to

RHE to measure the ability of SE484 to reduce IL-36γ. In both cases, cell-free supernatant or SE484 cells, erlotinib-induced IL-36γ

levels were reduced.

Figure

7. The anti-IL-36g activity of SE484 on RHE. Reconstructed human epidermis, or RHE, was treated for 72 hours with 1 mM erlotinib

alone or with cell-free supernatant (CFS) from SE484 culture (A), or with approximately 108 or 109 CFU of SE484

(B). RHE feeding media was then assayed by ELISA for IL-36γ levels.

Figure

8. IL-8 induction by Poly I:C is Reduced by CS of SE484. The presence of culture medium from SE484 prevents the stimulation and release

of IL-8 by poly I:C (red arrow). An inhibitor of poly I:C is used as control (blue arrow). Data are representative of two independent

experiments. CS = culture supernatant.

Figure

8 shows the inhibitory effect of SE484 culture supernatant on the induction of IL-8 by poly I:C. Similar to IL-36γ, when poly I:C

is added to HaCaT cells, IL-8 is also secreted, several fold above background (as seen in untreated HaCaT and SE484-treated HaCaT). However,

in the presence of SE484, lower levels of IL-8 were detected, thus further demonstrating the efficacy of SE484 to inhibiting the proinflammatory

pathway involved in EGFRi-related rash.

Our

results show that culture media of S. epidermidis strain SE484, which was isolated from a healthy human volunteer, can reduce

the level of IL-36γ and IL-8 produced by HaCaT cells (Figure 7 and Figure 8, respectively) and thus help in the treatment of EGFRi-

related rash. In addition to its anti-IL-36γ property, SE484 also has broad activity against different methicillin-resistant S.

aureus, or MRSA, strain types as well as methicillin sensitive S. aureus, or MSSA. The ability of SE484 to reduce IL-36γ/IL-8

levels as well as its activity against S. aureus and the engineered D-alanine auxotrophy enabled us to nominate strain SE484 for

use as the active microbe in the ATR-04 drug product formulation to form the basis of a treatment and reduce the severity of EGFRi rash.

We

have also shown that SE484 leads to in vitro inhibition of known virulent strains USA300, which is resistant to methicillin, and

MSSA, which is sensitive to methicillin. The following data show that ATR-04 reduces the ability of the pathogenic S. aureus bacterial

species to grow and instigate infections that are seen in patients with EGFRi rash.

Figure

9. Epidermin-expressing SE484 kills S. aureus with similar activity as mupirocin on in vitro agar plates.

We

are proposing an initial study of SE484 in the ATR-04 formulation in patients. It is contemplated to be a Phase 1b multi-center, randomized,

double-blind, single-dose, placebo-controlled trial in patients with colorectal or head and neck cancer who are initiating EGFRi therapies.

The primary endpoint is safety, and secondary endpoints will include efficacy and Quality of Life, or QoL We are planning to submit an

IND by mid-2024. Subject to FDA clearance of our IND, we expect to commence our Phase 1b clinical trial in fourth quarter of 2024.

ATR-01

for the treatment of ichthyosis vulgaris

ATR-01

is our drug product candidate intended to treat ichthyosis vulgaris. The program is currently investigating a proprietary and patent-pending

novel engineering segment of human filaggrin protein. ATR-01 is being developed as a topical application intended to address ichthyosis

vulgaris, a chronic scaly skin disease with an estimated incidence and prevalence of 1 in 250, which gives a total patient population

of 1.3 million in the United States. Ichthyosis vulgaris is caused by loss-of-function mutations in the gene encoding filaggrin Using

synthetic biology tools for protein engineering, we attached a cell penetrating peptide to filaggrin, which helps facilitate deeper skin

delivery for filaggrin. This is designed to overcome the impenetrability of the skin barrier, which would otherwise limit topical protein

delivery.

Ichthyosis

vulgaris overview

Ichthyosis

vulgaris, or IV, is a chronic, xerotic, scaly skin disease with an estimated incidence and prevalence of 1 in 250, which gives a total

patient population of 1.3 million in the United States. Clinical features of IV usually appear at around 2 months of age and include

generalized xerosis and fine, white to gray scales that are prominent on the abdomen, chest, and extensor surfaces of the extremities.

Although rare, some IV patients also experience hypohidrosis and heat intolerance. The pathogenesis of IV has long been identified as

a decrease in the size or number, or even a complete absence of, epidermal keratohyaline granules. In addition, patients with IV are

at increased risk for atopic dermatitis, asthma and allergies.

Ichthyosis

vulgaris is an autosomal semidominant disease caused by loss-of-function mutations in the gene encoding filaggrin. Filaggrin is an essential

structural protein that is derived from profilaggrin, which breaks down into individual filaggrin units in the stratum corneum. These

reinforce the skin barrier by binding to keratins and other intermediate filament proteins in the keratinocyte cytoskeleton. Many studies

have identified loss-of-function mutations in FLG in IV patients, and these mutations are associated with disorganized keratin

filaments, skin barrier defects and microfractures in the stratum corneum leading to enhanced percutaneous allergen sensitization. Moreover,

filaggrin and its breakdown products have significant additional functions in the skin including moisturizing the skin (via hygroscopic

amino acids or “natural moisturizing factors”), effecting production of antimicrobial molecules (particularly against S.

aureus) and maintaining both a beneficial lipid profile and pH in the skin.

There

are few effective therapies for the treatment of IV. Current treatment options for IV include primarily topical water evaporation suppressants

(e.g., sodium chloride, urea, lactic acid, salicylic acid), and, to a lesser extent, moisturizers (e.g., glycerol, propylene glycol,).

Topical retinoids may also be prescribed in an effort to slow the body’s production of skin cells. However, long-term retinoid

use is not ideal. Of particular concern is the teratogenic effect of all retinoids, which limits their use in women of child-bearing

potential. Chronic toxicities from long term therapy with retinoids may result in skeletal abnormalities. Furthermore, the chronic use

of retinoids in children may inhibit their growth. Notably, many patients with IV experience a significantly reduced quality of life,

due to self-consciousness and social embarrassment, and see a negative impact on domestic life, educational/professional lives and even

leisure/sports activities.

Our

solution – ATR-01 for the treatment of ichthyosis vulgaris

It

is now known that IV is caused by loss-of-function mutations in the gene encoding filaggrin, leading to disorganized keratin filaments,

skin barrier defects and microfractures in the stratum corneum, and resulting in enhanced percutaneous allergen sensitization as well

as bacterial and viral skin infection. We are developing ATR-01 as a novel treatment modality for IV that directly addresses the disease

pathophysiology. ATR-01 consists of FLG9-10 functional unit of the human FLG protein with an attached cell penetrating peptide. The goal

is to supplement the skin with stable delivery of hFLG via topical application and deeper skin penetration with a cell penetrating peptide.

Preclinical

data for ATR-01

Human

FLG units (domains 9-10) were evaluated on human skin explants (from plastic surgery) ex vivo. The skin barrier of the explants

was compromised by repeated tape-stripping such that transepidermal water loss, or TEWL values were significantly increased compared

to normal skin. As shown in the example below, daily topical application of a human filaggrin unit with a cell penetrating peptide for

five days resulted in a dose-dependent (not shown) rapid improvement in TEWL, suggesting improved skin barrier. Thus, topical delivery

of a recombinant hFLG unit coupled with a cell penetrating peptide can improve/accelerate the repair of damaged human skin barrier.

Figure

10: Topical filaggrin application on tape stripped ex vivo human skin following human filaggrin application.

Lastly,

we have shown that topical filaggrin can improve skin barrier defects in filaggrin-deficient mouse models. Recombinant mouse filaggrin,

or mFlg, was applied to the tail of flaky tail, or FT, mice (a mouse model that has a knockout in the filaggrin gene) once daily

for 2 weeks (50 μg total protein/tail sections or 15.2 μg total protein/cm2). Daily treatment with mFlg significantly

improved transepidermal water loss in FT mice when treated (FT+FLG group) compared to vehicle (“baseline” group). The third

group on the X-axis is a normal, control, wild type group (WT) that does not have the filaggrin gene knocked out. Treatment of

damaged mouse skin with recombinant mFlg combined to a cell penetrating peptide improved damaged mouse skin barrier (Figure A below).

Additionally, histological analysis of the epidermis of the mouse tail sections showed tendency for improved stratum corneum thickness

with mFlg treatment (Figure B below). In this graph, the Y-axis represents thickening of the stratum corneum, which starts to fractionate

or scale after growing past a normal thickness. Treatment with mFlg improved the thickness in four of six of the samples.

Other

Potential Product Candidates

Beyond

our three lead product candidates, our goal is to develop a broad portfolio of product candidates focused on expanding the application

of our platforms for precision dermatology. We have a proprietary platform for discovering and developing therapeutic products for precision

dermatology. Our platform is built around a microbial library comprised of approximately 1,500 unique bacterial strains to allow screening

for unique therapeutic characteristics and utilizes microbial genetic technology that analyzes, predicts and engineers the proteins,

peptides and molecules made by skin microbes. Our ability to genetically engineer intractable microbial species is uniquely leveraged

by our exclusive license to the SyMPL technology.

Bayer

Joint Development Agreement

In

December 2019, we entered into a Joint Development Agreement, or JDA, with Bayer pursuant to which we agreed to the joint development

of certain strains selected from our proprietary microbial library. We and Bayer have agreed to cooperate in the identification and in

vitro and ex vivo characterization of microbial strains for topical formulations. Bayer paid us a one-time $150,000 payment

upon execution of the JDA and has agreed to reimburse us for our development costs. In October 2021, Bayer expanded the option agreement

and paid us $375,000 for additional characterization work. We have granted Bayer an option to acquire an exclusive royalty bearing license

for up to six strains subject to development activities under the JDA, including an exclusive royalty bearing license to any related

patent rights. After screening through hundreds of strains, we and Bayer have selected two particular strains to move forward with in

vitro and ex vivo characterization, which we intend to develop as potential over-the-counter cosmetic products. We completed

the characterization work and delivered the data to Bayer in the fourth quarter of 2023, at which time Bayer has 12 months to exercise

its option to license the strains and related patents. Upon the conclusion of the characterization studies and our delivery of the data

to Bayer, the JDA will end, but Bayer has the option to license the strains and related patents. As of the date of this report, we have

not negotiated a commercial license agreement with Bayer and we will not do so until such time, if ever, as Bayer exercises its option

to acquire an exclusive royalty bearing license.

In

September 2020, Bayer’s venture capital group, LEAPS by Bayer, purchased $8 million of our Series B preferred stock.

Sales

and Marketing

Given

our stage of development, we have not yet established a commercial organization or distribution capabilities. We plan to build focused

capabilities in the United States to commercialize our development programs focused on live biotherapeutic products and recombinant proteins

for the treatment of skin diseases, where we believe the patient populations and medical specialists for the indications we are targeting

are sufficiently concentrated to allow us to effectively promote our products, if approved for commercial sale, with a targeted sales

team. In other markets for which commercialization may be less capital efficient for us, we may selectively pursue strategic collaborations

with third parties in order to maximize the commercial potential of our product candidates.

Manufacturing

We

do not own or operate manufacturing facilities for the production of our current product candidates. We currently rely on third-party

contract manufacturers for all of our required raw materials, manufacturing devices and active pharmaceutical ingredients and for our

preclinical research and clinical trials. Although we are able to manufacture finished product in our Groton Connecticut facility for

our clinical trials, we will rely on third parties for the manufacture of our finished product for commercial sale. We do not have long-term

agreements with any of these third parties. We also do not have any current contractual relationship for the manufacture of Phase 3 clinical

trials or commercial supplies. We intend to enter into agreements with third-party contract manufacturers and one or more backup manufacturers

for future production. We are analyzing the feasibility of building manufacturing capabilities for future development and commercial

quantities of any products that we develop. Such products will need to be manufactured in facilities, and by processes, that comply with

the requirements of the FDA and the regulatory agencies of other jurisdictions in which we are seeking approval.

Competition

The

biopharmaceutical industry is characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary

drugs. While we believe that our knowledge, experience and scientific resources provide us with competitive advantages, we face potential

competition from many different sources, including other biopharmaceutical companies, academic institutions and governmental agencies

as well as public and private research institutions. Any drug candidates that we successfully develop and commercialize will compete